On 1 April 2016, Land and Buildings Transactions Tax (LBTT), the Scottish version of Stamp Duty Land Tax which was introduced in England and Wales a year earlier, was amended so that the purchase of an additional property attracted a supplement of 3 per cent of the purchase price, payable by the purchaser.
At face value, this new tax would seem to apply only to the purchase of a second property. The reality is it applies to a lot more than simply this and its net is much, much wider.
The law now states that if, at midnight on the date of purchase, the buyer owns more than one house, then the Additional Dwelling Supplement (ADS) is payable. Policy objectives are clearly up to the Scottish Government to set and, in this case, it was to enhance the opportunities for first time buyers to enter the housing market in Scotland.
A similar tax was introduced for the rest of the UK and it was felt that if Scotland did not follow, it would make it more attractive to purchase additional residences in Scotland than in the rest of the UK. This, in turn, would create difficulties for first time buyers in Scotland. However, there are unintended consequences.
For example, if an elderly aunt dies on a Wednesday, leaving her house to her nephews and nieces they, I am sure, would be delighted. However, if one of those nephews or nieces was in the process of buying their first home (to move in to and live in) then that nephew or niece would find themselves with an additional 3 per cent tax to pay because at midnight on the date of their purchase, they will be deemed to own two houses. The purchase of their new house will be a second home and therefore ADS applies.
In addition, there may be penalties where they have not paid the new tax because, at the time they purchased their house, they might not even have been aware that their relative had left them a share of her property. South of the Border, this conundrum has been addressed by ignoring inheritances within two years of a purchase.
Similarly, if a holiday home in Europe is owned jointly by parents and children, when one of the children comes to buy their first house, they will be deemed to own the holiday home in its entirety and, again, own two dwellings at midnight on the date of their purchase, making ADS payable. For a £200,000 property that would be an additional £6,000 of tax on the purchase of a first home.
Moving forward a few years, when the child sells their home and buys another, they will be replacing a main residence and therefore ADS will not apply. However, if the new home is purchased first, ADS will have to be paid and then reclaimed if the previous home is sold within 18 months of the purchase of the new home. These are both situations where a first time buyer is caught by ADS because of the way the Scottish legislation is designed.
While the heading for the legislation is “Additional amount: Transactions relating to second homes etc”, the reality is this new tax applies in many situations where a buyer is not really buying a second home. Particularly in the case of inheritances, where the buyer has not yet even received their inheritance and indeed, may never receive the inheritance because the home will be sold as part of the Executry process, the individual will still be burdened with the additional tax.
Inadvertently, first time buyers may find themselves potentially facing penalties for not paying a tax in circumstances where it is not clear to the layman that a second home is technically being purchased.
This new tax contains many pitfalls which will catch out the unwary and it should be considered prior to a property being bought, to make sure that it does not apply. Even during the conveyancing process, if a purchaser’s circumstances change and they are fortunate enough to benefit under a will, the advice concerning ADS will have to be reassessed.
This, therefore, is a tax which is not as simple as what it says on the tin!
John McArthur is Head of Tax, Gillespie Macandrew