May 2017 – “Fixing a blip with ADS” – The Additional Dwelling Supplement & Second Homes

Author: Mitchells Roberton
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  • Something was said about Additional Dwelling Supplement in Bullet Point Update 1 of 2016 (“Second  homes &  Land and Buildings Transaction Tax”). This note focuses exclusively on a particular forthcoming change to the rules about ADS concerning cases where a couple are jointly buying a new home.
  • The way in which the existing rules work is to treat a couple as a single economic unit for ADS purposes. As a result the rules can (unintentionally it now appears) operate unfairly in circumstances where a couple are jointly buying a new main residence to replace a former main residence which was owned solely by one of them. The change is designed to avoid that unfairness.
  • The change will not however be retrospective: the new relief will only apply to transactions with an “effective date” on or after 30 June 2017 where the “missives” are entered into on or after 20 May 2017.
  • The relevant Order is not yet in force but is expected to have effect from 30 June 2017.

General background points

  • ADS is on top of the normal Land and Buildings Transaction Tax (“LBTT”) which applies when buying a home.
  • ADS applies on purchases of additional residential properties  – such as buy-to-let properties and second homes.
  • The ADS is 3 per cent of the total purchase price of an additional residential property purchase of £40,000 or more. Where applicable, it is payable in addition to the LBTT that would be due on the purchase.
  • So, for example, suppose an individual owns their main residence and decides to buy an additional residential property to rent out which costs £280,000.  The ADS would be £280,000 x 3% = ADS of £8,400.
  • The ADS would be in addition to LBTT where the tax would be: 0% for the first £145,000; then 2% for the next £105,000; then 5% for the next £30,000 =  LBTT of £3,600.
  • In principle, ADS does not apply if you are simply moving house and replacing one main residence with another. But timing makes a difference here. The general idea of ADS is that it applies where you own more than one residence and that can happen temporarily if you’re moving house and you buy your new property before selling your old one. In these circumstances you may have to pay ADS and claim it back: where ADS has been paid and the buyer has been able to dispose of their previous main residence within a specified 18 month period the buyer may claim a repayment of the ADS paid.

Couples as an “economic unit” – the “unintended consequences” 

  • The ADS rules apply where the buyer owns more than one “dwelling” and “the buyer is not replacing the buyer’s only or main residence”.
  • In order to qualify as “replacing” a main residence (and so avoid ADS) you have to have “disposed of the ownership” of a dwelling. In other words, you have to have owned the dwelling (or part of it) in order to qualify as “replacing” it if you are going to avoid ADS.
  • When it comes to couples, the current rules also provide that if any one of two joint buyers is “not replacing the buyer’s only or main residence” then ADS will apply to their joint purchase of a new home.
  • So, for example, suppose Mr and Mrs X live in a property  (“the Old Home”) which Mr X owns in his sole name; and suppose, under the existing rules, they decide to move and buy a replacement home (“the New Home”) in their joint names.
  • In these circumstances, one of the buyers of the New Home – Mrs X – did not own any part of the Old Home and so cannot have “disposed of [its] ownership” as a dwelling. Accordingly she cannot, in terms of the ADS rules as they stand, be taken to have “replaced” it – because in order to count as having done so she’d have to have owned part of it in the first place. So, ADS would apply to their joint purchase of the new Home.
  • But, ADS was not intended to apply in this way in such circumstances – hence the change to the rules to “fix the blip”.

The fix to such “unintended consequences” of the existing rules

  • The Order which changes the existing rules  (“The LBTT (Additional Amount-Second Homes Main Residence Relief) (Scotland) Order 2017”) is designed to resolve these “unintended consequences” and outlines matters as follows in its Explanatory Note (paragraphing and emphases added):

“This Order … provide[s] relief from additional second homes tax where spouses, civil partners or co-habitants jointly buy a dwelling house but the dwelling house being replaced is owned by only one of them. 

In terms of the provision inserted by article 3, a repayment may also be claimed if, within 18 months of a chargeable transaction under which spouses, civil partners or cohabitants acquire a dwelling house as joint owners to be used as a main residence (and pay additional dwelling supplement on the transaction), one or other of the joint buyers disposes of a dwelling house that has been used by both of them as their main residence.”

Note: This material is for information purposes only and does not constitute any form of advice or recommendation by us. You should not rely upon it in making any decisions or taking or refraining from taking any action. If you would like us to advise you on any of the matters covered in this material, please contact Alison Gourley: ajg@mitchells-roberton.co.uk

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