LBTT Additional Dwelling Supplement: the new 36-month rules

This is the second blog in our overview of the changes being made to the LBTT additional dwelling supplement (ADS) rules following the consultation announced in February 2023. This blog looks at the extension of various time limits from 18 to 36 months which will take effect from 1 April 2024.

Please note that the draft SSI has not yet been approved by the Scottish Parliament.

Why do the new ADS time limits matter?

If an individual buyer owns two or more residential properties on the date they acquire a dwelling, then they are potentially subject to the ADS at 6% on the whole purchase price.

If the property being purchased is to be used as the buyer's new main (or only) residence the current replacement of main residence rules give two ways of mitigating the potential ADS charge.

First - if a buyer is replacing a main residence, no ADS is payable on the new main residence. To replace a main residence under the current rules, a buyer must have BOTH: (i) disposed of ownership of a prior main residence in the 18 months before the purchase date; and (ii) have lived in that property as a main residence in the that 18-month window.

Second – if a buyer has paid the ADS when buying a new main residence, under the current rules they can reclaim the ADS from Revenue Scotland if they: (iii) sell a prior main residence in the 18 months after the purchase date; and (iv) lived in the disposed of property as a main or only residence in the 18 months before the purchase date.

These time limits are pretty short, and don't necessarily take account of circumstances out of taxpayers' control. For example, slower rural markets, delays in moving due to unexpected events, overseas postings for some workers, family separations and so on.

How have the ADS time limits changed?

From 1 April 2024, buyers who are potentially affected by the ADS will have twice as long to sell a main residence after acquiring a new home to recover the tax. They will also be able to "look back" twice as far – so a main residence sold 36 months ago can frank a purchase. The extension of the time limits also applies to when a buyer needs to have last lived in the prior main residence to claim the exemption or make a reclaim.

And will it apply to everyone?

No. This change – like all of those contemplated – isn't retrospective. However, the legislation lacks transitional provisions: it doesn't explicitly state how the new limits will apply to taxpayers from 1 April 2024.

For the replacement main residence exemption, whether the new time limits apply will clearly only be available if the purchase of a new residence settles on or after 1 April 2024.

What is less clear (and where a transitional provision would really have helped) is how the time limits will apply to taxpayers looking to recover the ADS that they've already paid. Specifically, the case of buyers who paid ADS before 1 April 2024 and who still have a prior main residence to sell. Do they have 18 months or 36 months from the date of purchase to sell their old home and make a reclaim?

While the legislation isn't clear, our initial reading is that whether the old (18 month) or new (36 month) window applies to you is determined by the date you settle the purchase of your new main residence. You must have bought the house (potentially) triggering the ADS on or after 1 April 2024 to benefit from the new time limits.

This is suggested in the policy memorandum accompanying the SSI which states that:

"The new and amended provisions will apply to transactions with an effective date on or after 1 April 2024."

In other words, it’s the effective date of the purchase that determines which rules apply.

However, this is an important point and will impact some taxpayers. The Scottish Government should take the opportunity to clarify the point on the public record while the draft SSI is under review by the finance committee.

Explain…

Ok. Consider these examples:

Example 1: Selling before you buy

Jack sells his former main residence in January 2022. He also owns a second residential property which is let to tenants. He buys a new main residence in March 2024. The replacement of main residence rules will not apply, and ADS will be payable on the new main residence. This is because under current rules the new main residence has to be purchased within 18 months of the sale of the former main residence.

If Jack does not buy his new main residence until April 2024, no ADS will be payable. The new rules will apply to the purchase of the new main residence and as he buys the new main residence within 36 months of the sale of the former main residence, no ADS will be payable. So it could be worth delaying the purchase of replacement main residences until on or after 1 April 2024 to take advantage of the new rules.

Example 2: Buying before you sell

Jill bought a new main residence in February 2023 and had to pay ADS because she had not managed to sell her former main residence. The former main residence is eventually sold in October 2024.

Can Jill reclaim the ADS?

No: The former main residence is sold 19 months after the new one was purchased. It seems clear that the intention is that the new 36 month rules do not apply, because the new main residence was purchased in February 2023 (ie before 1 April 2024).

The alternative analysis is that Jill should be able to reclaim, because by the time she sold her new main residence the extended time limits were in force. As mentioned above, we think this is unlikely to be the correct view.

That seems unfair…surely Jill could argue her case even though she bought before 1 April?

Sadly not. The first-tier tax tribunal decisions for Scotland are full of ADS cases where taxpayers have argued the unfairness of the legislation – in each and every case the taxpayers have lost, even where the court has been sympathetic to their plight. As the tribunal stated in the Christie judgement:

"it is well established law that the First-tier Tribunal cannot take into account whether or not it considers the law with which it is dealing to be fair or not."

So, pay attention to the changing time limits and consider carefully if they affect you.