This is the fifth and final blog in our series looking at the new ADS rules which are planned to come in to force on 1 April 2024. In this blog we look at the new relief for inherited property, as well as the new rules around part owned property.

What's the current ADS treatment for inherited property?

In short: not much. While there is no LBTT or ADS on the actual inheritance (such transactions are exempt as they are for nil consideration) there are two issues around inherited property that typically crop up in practice:

First - at what point in the administration of an estate does a beneficiary count as owning a dwelling? In my view, the current position set out by Revenue Scotland on this leaves much to be desired.

Second – and this flows from the first – inheriting a dwelling can interfere with a taxpayer's ADS position.

If Alexander inherits a house on the death of his father Philip before Alexander has bought his first home, then he will be subject to the ADS on buying that first home (he will own 2 or more dwellings) unless some pre-purchase tax planning takes place. If the death and the purchase occur close together then knowing exactly when Alexander is treated as owning the inherited dwelling is very important.

This is all compounded by the treatment of part ownership of dwellings.

What is the ADS treatment for joint ownership of dwellings?

Basically, if you own a bit of it you are treated as though you own all of it. This applies equally to both joint ownership and common ownership. There is an upside and a downside to this.

The upside is that, because one is already deemed to own the whole of a dwelling in which one has a part share, Revenue Scotland accept that an increase in a person's ownership does not trigger the ADS. So, if Alexander inherits a 50% pro-indiviso share in Philip's house, and then buys the other 50% share from his sister Cleopatra, there is no ADS on that purchase. Alexander may still be liable to ordinary LBTT though.

The downside is that owning even a tiny slice of a dwelling can cause havoc. When we apply the "2 or more" test for ADS, we are only counting dwellings whose price (if we are buying them) or value (if we own them) is more than £40,000. Because taxpayers are deemed to own the whole of any dwellings they have a part interest in, a 1/100th share of a dwelling worth £41,000 would result in a tax payer being treated as owning that dwelling.

So, if Alexander inherits a 10% share of a holiday home worth £41,000 (i.e., the share is worth £4,100), that's enough to tip his first house purchase into the ADS unless further steps are taken.

How are the ADS rules for inherited property changing?

With the introduction of the world's most niche tax relief.

The relief is available ONLY where:

  • The buyer (or if joint buyers one of them) owns two or more dwellings;
  • This is fine – it's part of the conditions for the tax to apply.
  • On the date of purchasing a new dwelling, all additional dwellings but the new one (the "secondary dwellings") were acquired after the conclusion of missives for the new one.

This is a VERY tight restriction, broadly the timing of acquisition of all but the purchased property needs to occur after exchange of missives but before completion. For most residential purchases, the gap between acceptable of a verbal offer and date of entry is c. 6-8 weeks. Very often Scottish conveyancing practice is not to issue the unqualified acceptance concluding the missives until very close to the date of entry itself. So this window could in practice be very slight.

  • The buyer is the beneficiary of a deceased person's estate and acquired all of the secondary dwellings from the executors, or otherwise as a result of the death of a person.

The inclusion of "otherwise…as a result of the death of a person" is helpful here. For example, the fiar under a proper liferent will be treated as owning the property for ADS purposes on the death of the liferenter, but that acquisition occurs outside of the executry and administration of the estate.

  • For the purposes of the exemption, a buyer is treated as acquiring property from an executor on the date when the disposition of the property is delivered.

This is potentially helpful, although Revenue Scotland's guidance around when an inherited property is treated as owned is still somewhat confusing.

Their general guidance at LBTT10066 on inherited dwellings and ADS (which has been updated to account for the new rules as of 6 March 2024) still refers to inherited dwellings being treated as owned from – for example – "the date when the residue of the estate has been ascertained or can be identified".

If Revenue Scotland accept – as a pragmatic position that: (i) an inherited dwelling is only owned once a disposition is delivered or the property is appointed out to the beneficiary in question; and (ii) that refusal to accept delivery is sufficient to prevent ownership, then this would be a welcome change and would give some much needed clarity to this area.

How are the ADS rules for joint ownership changing?

Very briefly – for the purposes of the 2+ rule (in paragraph 2(1)) but seemingly not for any other purpose one can ignore a share in a dwelling which is worth less than £40,000.

So, our Alexander above wouldn't count his 1/10th share of the holiday home – which share is only worth £4,100 towards his number of dwellings when calculating whether he breaches the 2+ limit on a future purchase.

What's deeply odd, and likely an oversight by the draftsman, is that shares of less than £40,000 are only ignored for the 2+ test, but still counted elsewhere. The three point where this could be an issue - and a potential bear trap - are:

  • Paragraph 8(1)(d) – the "how many people need to pass the replacement of residence" tests for exemption from to a reclaim of ADS to be available. It seems one still has to count small shares for this purpose. But why?
  • It won't apply for the relief for divorcing or separating couples – which is only available where the departing spouse / partner only owns two dwellings on their purchase of a new home. SO a small share could invalidate the relief.
  • It doesn't apply for the inherited property exemption either. A similar issue to the divorcing couples' relief could apply, where the exemption is blocked by the existence of a small share.

The lesson here is: you cannot wholly ignore small shares!

One happy point from all this -- the new legislation is framed so that if one increases one's share then the upside above – no ADS – still applies. So, if Alexander takes is share of a holiday home worth £4,100 and grows it to the full £41,000, he will not pay ADS on that acquisition.