ADS Changes – Family Separations

This is our fourth blog on the changes to the ADS legislation that are likely to come into effect on 1 April 2024. In this blog we look at the new provisions around divorcing and separating couples.

Why are the ADS rules on divorce and separation changing?

Family separations are – under the current rules – another area where unintended ADS consequences can arise, often the party leaving the family home wounds up being treated as a second home-owner and subject to an irrecoverable ADS charge.

Example 1: Athelstan and Boudica

Athelstan and Boudica are a married couple with two children. They own their family home together in joint names and own no other dwellings.

In January 2021 they begin divorce proceedings and Athelstan moves out. As part of the divorce settlement, they agree that they will retain ownership of the family home in joint names until their children have left school. Boudica will remain in the home until then, after which it will be sold.

In February 2024, Athelstan buys a new home. His only other home is the old family home. Unfortunately, that is enough to tip him in to the ADS. At the date of purchase, he owns two dwellings and is not replacing a main residence. Therefore, he will pay ADS on the purchase price in addition to ordinary LBTT.

If the old family home is then sold – let's say in May 2024 – Athelstan cannot recover the ADS. Under the current rules he needs to have lived in the old family home in the 18 months before February 2024. He hasn't, so the ADS sticks.

I think we can agree this is both unfair and wasn't what the drafts people intended. Nevertheless, it is what the current law says.

How are the ADS rules on divorce and separation changing?

From 1 April a new relief will be available for parties to a separation that go on to buy new dwellings. However, the conditions around the relief are relatively strict and it is not a total panacea in all cases of separation.

The relief is available on the purchase of dwelling only if:

  • After the purchase the buyer owns two dwellings (note: exactly two, not two or more);
  • The other dwelling (i.e., not the one being bought) used to be the main residence of both the buyer and the buyer's spouse or civil partner (including former spouses and civil partners);
  • That other dwelling is still at the effective date of the purchase the main residence of the buyer's spouse or civil partner (including former spouses and civil partners);
  • That the buyer and their (former) spouse or civil partner don’t intend to live together again; and
  • The buyer retains an ownership interest in their former main residence pursuant to a court order or a separation agreement.

What stands out to me immediately about this are:

  • The exclusion of separating cohabitants. It's not clear to me what the policy rationale is for this, since a long-term cohabiting couple with children would be subject to very similar practical concerns on separation as married couples and civil partners.
  • The relief is only available if the buyer owns exactly two dwellings, not two or more. Arguably this only covers properties the buyer actually owns or is deemed to own under a trust or liferent arrangement and is not affected by the single economic unit rules.
  • This is a relief only, and only applies at the time of purchase – it's not a disregard or deemed disposal of the former family home which would arguably be more helpful. It also doesn’t have any impact on the ADS repayment provisions.
  • There is no backwards looking time limit within which the buyer must have lived in the former family home. So the new 36 month limit won't apply here.
  • These rules still seem too inflexible. They are drafted with a view to fixing a specific scenario and don't engage with the different ways a separating couple may choose to manage their affairs.
  • What happens to joint buyers? This is discussed below.

Can you give some examples?


Example 1A: Athelstan and Boudica (again).

Imagine Athelstan, on reading this blog, decides to delay his purchase until 1 April 2024.

In that case the new rules would apply, and Athelstan should benefit from the new relief provided their arrangements are captured in a separation agreement. At the time of purchase, he owns two dwellings. He lived in the other dwelling as his main residence with his spouse, Boudica. Boudica lives there still.

Thus, Athelstan is liable to normal LBTT only.

This is, I think, the right result for Athelstan.

Example 2: Cyrus and Darius – more than two properties.

Cyrus and Darius are civil partners who own their main residence together. They have two children. Cyrus also owns a share in his mother's old house which he recently inherited.

In January 2021, Cyrus and Darius decide to separate and Cyrus moves out. To minimise disruption to their children they enter into a separation agreement stating that they will continue to own the old family home in joint names and Darius will continue to live there until their children have finished school.

On 1 April 2024 (Cyrus has read some of this blog, but obviously didn't pay enough attention) Cyrus buys a new home in his own name.

Here he doesn't get relief from the ADS – while he meets most of the conditions, he is caught by the additional share in his mother's home. This means Cyrus owns three dwellings and the relief isn't activated. The ADS is payable on his new home.

Cyrus tries to fix matters by gifting his share in the old family home into a discretionary trust to recover the ADS. Unfortunately, this doesn't work. Cyrus must rely on the ordinary ADS recovery provisions – and for those to apply he needs to have lived in the old family home in the three years before he made his new purchase.

Note that, if the provisions worked differently – for example – if Cyrus was deemed to have disposed of his interest in the old family home then the ADS wouldn't apply. But that's not how it works – the relief does not put Cyrus in the same position as someone replacing a main residence would be in.

Example 3: Elodie and Francois – joint buyers.

Elodie is divorced from her former husband, however they still own their former marital home in joint names in accordance with a separation agreement. She is looking to buy somewhere with her new partner, Francois. They buy a house together in joint names. On the same day, Francois sells his old house to fund the purchase.

The new relief doesn't appear to help. While Elodie can satisfy the conditions, Francois cannot.

Instead, Elodie and Francois must look to the joint buyer rules to see if they offer any comfort. There are now a number of way matters could play out depending on: (i) whether Elodie and Francois are cohabitants at the time of purchase; and (ii) what additional properties they own.

If neither Elodie and Francois own any other property, then they appear to be okay. Under my analysis (see this blog) of the joint buyer rules, only one of the couple would need to meet the conditions for disposing of a prior main residence to gain exemption under the new joint buyer rules – Francois does meet the conditions and they will live in the new house together. The exemption applies and the ADS is switched off.

The situation is more complex if Francois owns additional property too as then both Francois and Elodie may need to meet the relevant conditions.

This isn't the end of the world – but it does mean falling back on the joint buyer rules, which can be tricksy. However, they are more flexible than the current legislation which would simply have imposed the ADS on the couple. But what about…

Example 4: Gertrude and Holly – joint buyers who rent.

Gertrude is divorced from her husband, and they still own the former marital home in joint names pursuant to a settlement agreement. Gertrude has been living in rental accommodation with her new partner, Holly. Holly owns no other property.

On 1 April 2024, Gertrude and Holly buy a new home in joint names. They are utterly shocked to discover that despite the new relief (of which they are aware) they have to pay the ADS and may not be able to recover it.

Why? Well…

  1. At the date of purchase, Gertrude and Holly are cohabitants. For the purposes of the basic ADS conditions, they are deemed to own what each other owns under the single economic unit rules. Therefore, each of them owns two dwellings after the purchase – Gertrude owns her share of the old marital home and her share of the new home. Holly owns her share of the new home and is deemed to own a share of Gertrude's own marital home.
  2. Gertrude can satisfy the conditions of the new relief. However, Holly cannot. Under one of the general ADS rules for joint buyers – if one buyer triggers the ADS, it applies to the whole of the purchase.
  3. Unlike Elodie and Francois, Gertrude and Holly cannot rely on the new exemptions for joint buyers as they have no prior residence to dispose of.
  4. Therefore, the ADS just applies.

The kicker is that the ADS charge is only recoverable if: (i) Gertrude is able to dispose of her interest in the old marital home within three years of the purchase; and (ii) she actually lived in it (as her residence) in the three years before hand.

This, in my view, is an unfair result. I cannot see a sensible policy reason why Gertrude and Holly should pay the ADS, but they would have to. They are the victims of a perfect storm of legislative inadequacies: the inflexibility of the rules, which often only envisage one way of doing things; the fact that the rules effectively prioritise existing home-owners over renters; the general requirement that all buyers qualify for a relief or exemption unless specifically stated otherwise.

Any parting words?

As with other areas, the Scottish Government should be thanked for trying to tackle what is a complex issue. The forthcoming changes are an improvement over the current law. However, as we can see from the examples above, there are potential traps in the legislation still which can trip up unwary buyers and trigger irrecoverable ADS charges. 

I'd recommend people who may be affected on future purchases taking appropriate tax advice in advance. Some of the issues above could be solved with a bit of planning and forethought.

Let's hope that Revenue Scotland are willing to take pragmatic positions in applying the new law, and that the Scottish Government are willing to continue reviewing the ADS legislation in the future.

If you would like to know more about the ADS, please contact me, Alan Barr or Isobel d'Inverno.