The Scottish Cabinet Secretary for Finance, Shona Robison, delivered the draft Scottish Budget on 4th December 2024 in the Scottish Parliament. Amongst a raft of spending announcements and allocation of £200m for three new hospitals and £768m to build affordable homes was the news that the Additional Dwelling Supplement (ADS) is to increase by 2% to 8%, effective from 5th December 2024.

What is the Additional Dwelling Supplement?

When you buy a residential property in Scotland whilst already owning another residential property as your main home anywhere in the world, you must pay the ADS. Organisations buying residential properties in Scotland must also pay the ADS. The Additional Dwelling Supplement is in addition to any Land & Buildings Transaction Tax which would normally be payable on the purchase of a residential property.

The ADS was last raised, also by 2%, in December 2022 when it increased from 4% to 6%. This latest increase sees the ADS at its highest rate since its introduction.

Why was ADS introduced?

The ADS was introduced initially to help limit the impact of buy-to-let purchasers and second home buyers who were competing in the first-time buyer market. The UK and Scottish Governments took that view that by levying an additional on to those who wanted to purchase additional residential property, they would give first-time buyers an advantage when competing to buy property. The ADS, however, also caught organisations who bought residential property and they, too, must pay the ADS.

In addition, linked transactions between the same buyer and seller involving multiple properties in the same scheme will also attract LBTT and ADS on the total value of the scheme.

Of course, ADS provides much needed revenue to the Scottish Government. The Scottish Fiscal Commission calculate that the latest increase will raise £32m in additional revenue in the year 2025/26.

What is the financial impact of the increase in the ADS?

The best way to review the impact is with a worked example. 

If someone is buying a second home or making a buy-to-let purchase, the ADS will apply. This, of course, is in addition to any Land and Building Transaction Tax (LBTT) due on the purchase.

If the purchase price is £200,000 (which is close to the Scottish Average), then the amounts of LBTT and ADS are as follows:

Land and Buildings Transaction Tax: £1,100

Additional Dwelling Supplement: £16,000

Total £17,100

Prior to the increase on 5th December 2024, the amount of the ADS would have been £12,000. That means it would now cost the buyer £4,000 more in ADS for the same property had they bought it on 4th December 2024.

There are, of course, transitional arrangements, albeit implemented with almost no notice. If missives have been concluded prior to 5th December 2024 with a date of entry after that date, the ADS will be charged at the lower 6% rate.

You can use the Revenue Scotland property transaction calculator to work out how much LBTT and ADS you need to pay.

Unintended consequences of the ADS

There is also a long-standing issue with ADS when someone who is selling their own house and buying another house, has their sale fall through but is forced to proceed with the purchase. Even though there is the intention of moving from one house to another, the fact that they have been unable to sell their existing home means they will own two properties and will need to pay the ADS. This can have catastrophic consequences for a buyer whose sale has just collapsed where they are depending on their sale proceeds to fund their purchase and the costs of purchase. The collapse of their sale can cause them significant financial hardship.

Of course, when the buyer eventually sells their existing house, they can reclaim the ADS they have paid. They have, however, to find and pay it in the first place and that can prove expensive!

Property Solicitors in North Berwick and Dunbar, East Lothian

Our solicitors have many years of experience advising clients on the sale and purchase of property and all aspects of Land and Building Transaction Tax and the Additional Dwelling Supplement. If you have a question you would like to ask about LBTT or ADS or with to discuss your sale or purchase, please get in touch with us.