News & Updates

The Tartan Tariff on Scottish Property Ownership

Sarah-Jane Macdonald

Published bySarah-Jane Macdonald

6th February 2024

The Tartan Tariff on Scottish Property Ownership

With its rich history and picturesque landscapes, Scotland can be the ideal location to invest in additional property, whether it is a holiday home or a little fixer-upper. As alluring as that seems, clients often overlook the tax implications and other compliance burdens.

The “tartan tariff”, as it were, consists of the Additional Dwelling Supplement (ADS), the Register of Controlled Interests in Land (RCI), and Landlord Registration.

What is ADS?
ADS is effectively a second-home tax payable in addition to any Land & Building Transaction Tax (LBTT). Whilst similar in some ways to the SDLT higher rates for additional dwellings, ADS does have certain unique attributes.

One of the key differences is the tax itself, with ADS being charged at 6% of the total purchase price (for purchases of £40,000 or mote). For a holiday home of £250,000 this is an extra £15,000.

Much like the SDLT position, Revenue Scotland take a hard-line on what is considered to be a residential property, and if it is capable of being used as a dwelling, it is likely to incur that ADS charge.

Mixed-use properties will get the benefit of non-residential rates for LBTT purchases, but ADS is applicable on each of the dwellings being purchased. Multiple Dwellings Relief could assist in that scenario to reduce the tax due, and full relief is available from the ADS if six or more residential properties are being acquired in one transaction.

What is RCI?
Scotland introduced the RCI as a means of creating transparency of property ownership in Scotland. The register is designed to show who owns land (the Recorded Persons, i.e. those named on the titles) as well as who has underlying control of that land (the Associates).

Certain owners, such as companies registered with Companies House who are already subject to transparency regimes won’t have these obligations. However, it will require various individuals, trusts and partnerships that own land in Scotland to make entries on the RCI to show who significant influence or control over land.

The RCI became operational in April 2022 and has a grace period until 31 March, 2023, after which non-compliance can result in criminal penalties and fines of up to £5,000.

What about Landlord Registration?
It is also a requirement to register as a landlord before letting residential property, or, if short-term letting, to obtain a short-term let license.

There are certain exemptions from landlord registration, for example if letting to family. Otherwise, a landlord must register with each Local Authority where they will be letting residential property. Failure to do so can result in fines of up to £50,000, and being banned from registration.

Holidays lets ought to be exempt, albeit there is ongoing debate on the specific requirements to qualify. Regardless from 1 October 2023, it is necessary to obtain a Short-Term Let License before taking bookings or receiving guests (there are some transitionary rules for those who did so prior to October 2023).

Should clients still invest in Scottish property?
Whilst the Tartan Tariff may seem daunting, it shouldn’t put clients off making that investment. If expectations are managed and advice sought as to how best to structure that ownership it will ensure clients understand the tax implications and what compliance is required. A summary of some of the key options are set out below.

Owning Outright
The most straightforward route is to own property outright.

LBTT is charged at either residential on non-residential rates. ADS is then charged at 6% if any one of the individual purchasers owns another property anywhere in the world, at the date of purchase.

It is unlikely an entry in the RCI would be needed unless there is someone with a contractual right to make decisions over that land (care should be taken with powers of attorney).

If it is residential property being let out, the owner(s) will need to register as Landlords in the relevant Local Authority. Joint owners must separately register, but nominate a “lead”.

A company could purchase on behalf of an individual(s), holding title as bare trustee. As it currently stands, this would not require to register in the RCI, and would be treated for all other purposes in the same way as if it was a purchase by an individual(s).

Purchase by a Company
Where a company purchases a property, it too will face LBTT at the same rates as an individual. However, companies suffer ADS regardless of whether it owns any residential property. Companies will therefore always have the 6% charge for purchases of dwellings over £40,000.

As a company registered with Companies House, it shouldn’t need to make an entry in the RCI, but would need to register as a Landlord (albeit individual directors would not need to register).

Whilst having less property compliance requirements, it would have requirements as a company. There are also broader tax implications to consider particularly as to how income could be extracted as well as, potentially, the Annual Tax on Enveloped Dwellings.

Purchase by a Trust
Trusts perhaps have the most compliance. Each trustee must register as a Landlord in the same way as joint owners would, and RCI is required to show any changes of trustee, or any party with influence of control (e.g. a Protector). This is in addition to any requirement to register with HMRC’s Trust Registration Service.

Whilst discretionary trusts always suffer the ADS charge, an interest in possession can be granted to avoid ADS and manage the payment of income. If the income beneficiary does not own other property at the date of purchase, no ADS would be payable. Assuming there are flexible trust terms, it can also allow for alteration of the payment of income later.

That said full advice should be sought as to the broader (inheritance tax) position.

Early Advice to Avoid Issues
The key with all of these options is to seek advice early when considering investing in Scottish property. Otherwise, clients may face an unwanted tax sting, or worse a criminal penalty and hefty fine.

 

This article was first published with ThoughtLeaders4 Private Client Magazine.

The information contained in this newsletter is for general guidance only and represents our understanding of relevant law and practice as at February 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: 302 St Vincent Street, Glasgow, G2 5RZ. A limited liability partnership registered in Scotland, number SO 300336.