Purchasing a Residential Property – Pitfalls of Property Tax
Published byKaren Crothers
Tax. An inevitable part of life…and when purchasing a property.
Most people have heard of Stamp Duty - it was the tax payable to Revenue Scotland when you purchased a property. In 2015 the Government changed it to the much less catchy name of Land and Buildings Transaction Tax, or LBTT for short.
Currently, LBTT is payable on all residential purchases over £145,000. The exact amount payable depends on the actual Purchase Price. There is a very helpful online calculator available on Revenue Scotland’s website to help calculate the amount of tax due. Certain reliefs are available such as for first time buyers, allowing them to purchase a property up to £175,000 without having to pay LBTT.
As if paying LBTT wasn’t enough, if you are purchasing a second residential property, such as a second home, rental property or holiday home, you will have to pay an additional tax known as the Additional Dwelling Supplement or ADS for short. It has commonly become known as the ‘second home tax’ and is calculated at 6% of the total Price. The rules and regulation around ADS are complex but the basic three stage test is:-
1. As at the date of your purchase will you own two or more properties anywhere in the world (include any share in a property worth more than £40,000)?
2. Will the new property be replacing or will you be selling your only or main residence on the same day as your purchase?
3. If you do not own a property but your spouse, civil partner, co-habitant or dependent children do, you will be liable for ADS even if you purchase the property in your sole name. This is because of you are deemed to be part of the same ‘economic unit’.
In order to satisfy the second stage of the test three further conditions must be met:-
a. The buyer must have disposed of the ownership of a property during the 36 months (used to be 18 months) prior to the date of purchase;
b. The buyer must have lived in the property which has been sold as their only or main residence at some point during the preceding 36 months; and
c. On the Date of Entry of the purchase, the buyer must intend to occupy the new property as their only or main residence.
For the vast majority of people who purchase a property before they sell their current home, they are able to reclaim any ADS paid providing that they dispose of their previous home within 36 months of purchasing. There are however a few anomalies. For example, if you move into your new home but do not settle and decide to move back to your previous home, you cannot reclaim the ADS paid as you have not disposed of your original property.
Equally, if you have lived in a rented property for the last three years but own one or more rental properties, you will have to pay ADS as you will not have disposed of your main residence (being the rental property) within the required time period.
Finally, any purchase of a residential property by a non-individual, such as a company, investment trust or other corporate entity, will always pay ADS where the price is £40,000 or more.
It’s a complicated business! Speak to your solicitor early on and they will keep you right.
The information contained in this newsletter is for general guidance only and represents our understanding of relevant law and practice as at May 2024. Wright, Johnston & Mackenzie LLP cannot be held responsible for any action taken or not taken in reliance upon the contents. Specific advice should be taken on any individual matter. Transmissions to or from our email system and calls to or from our offices may be monitored and/or recorded for regulatory purposes. Authorised and regulated by the Financial Conduct Authority. Registered office: 319 St Vincent Street, Glasgow, G2 5RZ. A limited liability partnership registered in Scotland, number SO 300336.
