Additional Dwelling Supplement goes up to 6%

Written By: Kirsty Wilson
Category: Residential Conveyancing
09 January 2023

In the December 2022 Scottish Budget, John Swinney, the interim Scottish Finance Secretary announced an increase in the Additional Dwelling Supplement from 4% to 6%. Whilst this seems to be a “small” 2% increase, there are significant ramifications for buy-to-let and second homeowners. There is also the potential for financial pain for home movers who are unable to sell their current home.

What is the Additional Dwelling Supplement?

The Additional Dwelling Supplement (ADS) is a tax that is applied when someone buys a second or subsequent residential property. If you own a residential property anywhere in the world and buy a residential property in Scotland, you must pay the ADS. The ADS is payable on the full price of the property and is in addition to any Land & Building Transaction Tax (LBTT). Even if the price of the property is below the LBTT threshold, if you are buying a second or subsequent home, the ADS is payable on any residential property over £40,000.

In December 2022, the rate of ADS was increased from 4% to 6% with only 24 hours’ notice of the rise.

Why was the ADS introduced?

The Scottish Government introduced the ADS (which, initially, mirrored similar provisions in England and Wales) to help first-time buyers compete in a busy property market. The aim was to introduce additional costs facing buy-to-let property owners and second homeowners who compete in the same price brackets as first-time buyers and who had been forcing prices up, making some properties unaffordable for first-time buyers.

Another reason was to generate much needed revenue for the Scottish Government.

How does the ADS work?

When someone already owns a residential property (anywhere in the world) as his or her main residence or where an organisation buys a residential property and they pay more than £40,000, they need to pay the ADS. The ADS is payable on the full price of the property, now at a rate of 6% of the price.

Organisations (companies, partnerships, trusts etc.) who buy residential property must also pay the ADS on the purchase as well as buy-to-let property owners and those who buy a second home.

Unfortunately, those who are moving house but have not yet sold their current home also need to pay the ADS. This can have a significant financial impact should a sale of your existing house fall through.

It will also apply where a couple decide to buy a house in their joint names and where one (or each) of them already owns a residential property as their main residence. This can place a financial strain on reasonably new relationships.

Parties who separate can also experience ADS problems when, for instance, the family home is in joint names and one of the partners remains in the family home. If the title is not transferred into the sole name of the partner who stays in the family home, if the partner who has left the family home then buys a new house, he or she will need to pay the ADS on that purchase.

There are provisions where someone has been unintentionally caught with two residential properties that allow for the ADS to be reclaimed once the original property has been sold. However, there is a time within which the original property must be disposed of within 18 months of the purchase of the new property.

How about a worked example of ADS?

Perhaps the best way to show the impact of ADS (and the recent increase) is to show a worked example.

If you were to buy a second or subsequent residential property for, say, £195,000 (around the current average price of a property in Scotland), you would pay both Land & Building Transaction Tax (LBTT) and the Additional Dwelling Supplement (ADS).

In this example. The following tax would fall due:

LBTT: £1,000
ADS: £11,700
Total: £12,700

If the purchase had taken place or had been contracted to take place on or before 16 December 2022 (the day after the Scottish Budget), the ADS element would have amounted to £7,800. As you can see from his example, whilst a 2% increase in the ADS from 4% to 6% might seem small in percentage terms, in money terms, in this example, it is an increase of £3,900.

Given the projections that the property market is likely to slow down in 2023, perhaps this was not the best time to introduce such an increase in this tax. In addition, given that private residential property owners looking to add to their residential property portfolios will need to pay a higher rate of ADS, this will, inevitably, feed through into higher rents.

You can find out more information on LBTT and ADS on the Revenue Scotland website along with some more worked examples by clicking here.

If you are thinking about buying and selling, our experienced conveyancing solicitors are available to advise you on all aspects of selling and buying, including the implications of LBTT and ADS. Simply contact us to find out more.

Written By:
Kirsty Wilson