If you’re a property investor, or thinking of becoming one, you may not have heard of ADS in Scotland. But don’t worry, you’re not alone.
ADS, or Additional Dwelling Supplement was first introduced in 2016 and for some reason, has stayed under the radar for a lot of people. It’s perhaps been overshadowed by the more well-known Land and Buildings Transaction Tax (LBTT).
As a property professional who understands the importance of due diligence, I thought it was important to highlight ADS, as the last thing you need as a property investor is an oversight costing you a great deal of money (not to mention hassle).
So without further ado, let’s take a closer look at what ADS in Scotland is, and what it may mean for you as a property investor.
What is Additional Dwelling Supplement?
Additional Dwelling Supplement was introduced in 2016 at the original rate of 3%, increased to 4% in January 2019.
It applies to purchases of residential investment properties (such as buy-to-lets), or second homes, and is payable for homes purchased for £40,000 or more.
ADS in Scotland is charged in addition to LBTT, and applies to the entire purchase price (not just the first £40,000)
Are there any exemptions from ADS? Yes there are, and they are the same exemptions that apply to LBTT where the purchase of additional properties is concerned.
What should you look out for?
You don’t want to be caught out by ADS, so have a look and see if any of the following apply to you:
- If your spouse or partner already has property, and you then go on to buy a property together, ADS will apply even though this is your first time buying property. In effect, you are seen as a single entity.
- You have existing property that was a gift or an inheritance. ADS in Scotland still applies to subsequent properties even though you didn’t purchase the initial property in question.
- You already own property outside Scotland. To be clear, ADS applies to any properties you own worldwide.
- You’ve purchased property as a part of a partnership or private limited company. Beware, you are not exempt from ADS and will still have to pay.
- You’ll have to pay ADS if you’ve purchased less than six properties in a single transaction. This is below the threshold that ADS relief applies. More on that later.
With all this to bear in mind as an investor, it’s no wonder that ADS has the potential to trip you up, so let’s take a look at how it’s calculated. Hopefully, this will give you a better idea of how it will affect you.
How might ADS affect you as a property investor?
Let’s say you were purchasing a property of £250,000. ADS in Scotland at 4% would mean you can expect to pay £10,000. You would also be paying this in addition to LBTT of £2,100.
However, if you purchased an investment property at £80,000, you would pay £3,200 of ADS (again, worked out at 4%), but you wouldn’t have to pay LBTT.
This is because the threshold for LBTT applies to properties that are purchased for £145,000 or more. You can find out more about LBTT and how it’s calculated via the official Scottish Government website.
ADS can be reclaimed in certain circumstances. If you were to buy a new home whilst your first home is still on the market, then ADS would technically apply as you would be seen as owning two properties.
However the ADS amount can be reclaimed once the first home is sold, as long as the sale happened within 18 months.
How does ADS relief work?
If you decide to purchase a property portfolio composed of more than six properties, you can take advantage of a specific ADS relief. Full relief is available on any transaction where section 59(8) LBTT(S)A 2013 applies.
However, for this relief to be fully effective, it must be claimed in the first LBTT (Land and Buildings Transaction Tax) return made in relation to the transaction, or in a subsequent amendment to that same LBTT return.
Remember, relief from ADS in Scotland only applies to purchases of more than six properties in a single transaction.
TIP: You can find out more about Additional Dwelling Supplement exemptions and relief here on the official government website.
Advice from a property professional
I wanted to draw attention to ADS in Scotland because I still see that so many investors are unaware of it, and I don’t want anyone to be caught out.
I can’t stress enough the importance of due diligence, so always make sure you’re up to speed on the latest legislation and charges when considering investment in your next property.
Timing is also key. For example, if you were considering the purchase of a new home and an investment property around the same time. I’ll explain why:
ADS in Scotland only applies to the second property you purchase, so you could limit the amount you have to pay by buying the higher priced property first. Given the examples above, that’s quite a difference!
With all this to bear in mind, it’s a good idea to consider adding an accountant to your property team if you haven’t already. Where tax is involved, there is always fine print and so it makes sense to use a professional.
Conclusion
This might seem like an overwhelming amount of information. I get it. But it’s essential to take the time to consider all your options, as they could mean a real-world difference of thousands of pounds.
You may mind easier to have support in place such as an accountant that can catch any potential errors, rather than paying the price later. With the best will in the world, mistakes can be made so it’s best to be prepared.
I’m a firm believer in being equipped with the facts, so if you have any questions or concerns about what I’ve talked about in this blog, or property investment in general, please do get in touch to book a free, no-strings consultation.
Written by John Nicol
Founder, Ascension Property Investments
Get in touch on 01383 603091 or email me via [email protected]
