2. When is the ADS due?
2.1 This chapter provides some statistics about the payment of the ADS and summarises how the legislation works in terms of determining whether the ADS is due.
2.2 This commentary is not intended to represent every aspect of the ADS legislation and is solely intended to provide general context for the reader. For detailed guidance, please consult the legislation, in particular at Schedule 2A of the Land and Buildings Transactions Tax (Scotland) Act 2013 (hereafter referred to as "the Act"). All footnotes referencing legislation are references to the Act unless otherwise stated.
2.3 The Revenue Scotland guidance includes worked examples to illustrate how the ADS works in practice. Some of these examples are replicated, with minor edits, in this document to assist understanding in more specific scenarios. A wider range, along with detailed guidance, is available on Revenue Scotland's website. This reflects the diverse range of situations in which the ADS may apply.
2.4 Throughout this document, the term "dwelling" has the same meaning as that used in Revenue Scotland guidance.
How often is the ADS paid?
2.5 As overall context, over the five year period 1 April 2016 to end March 2021, around 510,190 residential LBTT returns were submitted to Revenue Scotland. Of these 22% (112,000) included an amount of tax related to the ADS. The amount of 'gross' (before repayments) ADS payable over this period was £670.6 million. This means the average amount of 'gross' ADS paid per transaction was just under £6,000.
2.6 The ADS is most frequently paid in areas with the largest number of property transactions. Five local authority areas - Glasgow, Edinburgh, Fife, South Lanarkshire and Highland - account for 44% of all ADS transactions.
Considering whether the ADS is due.
2.7 For policy and operational reasons, the legislative provisions for the ADS do not simply apply where a second home or buy to let property is purchased. Instead, two tests determine whether the ADS is due on the purchase of a dwelling with a consideration of £40,000 or more. This specific amount reflects the fact that a LBTT return is not required where the chargeable consideration is less than £40,000.
2.8 The two tests are summarised below. In addition to these, there are special rules for some transactions. These are covered in the box further below.
The First Test
2.9 The first test is that the buyer owns, anywhere in the world, more than one dwelling at the end of the day that is the effective date of the transaction. Effective date, in this context, is normally the date of completion.
2.10 In establishing how many dwellings are owned, where two or more buyers will be jointly entitled to the ownership of the purchased property, the first test is met if it is met by either of the joint buyers. As will be discussed below, the rules applicable to joint buyers differ in relation to the second test or in subsequently determining whether the ADS can be reclaimed after it is paid.
Revenue Scotland Worked Example
Roni is purchasing her first dwelling. Because she works away from home, she intends to rent it out with the view to possibly moving in there one day if her work situation allows. At the end of the day that is the effective date of the transaction, Roni owns one dwelling, so she will not pay the ADS.
Johnny is selling the dwelling which is his main residence and purchasing a dwelling to be used as his next main residence on the same day. At the end of the day that is the effective date of the transaction, Johnny owns one dwelling, so he will not pay the ADS.
2.11 In addition, in counting the number of properties owned, any property owned by a spouse, civil partner or cohabitant, along with their dependent children, will count. These are known as the "economic unit" provisions.
2.12 The economic unit provisions have a specific anti-avoidance purpose. They prevent, for example, a couple purchasing a second dwelling without having to pay the ADS where one of the couple already own a dwelling. They apply regardless of whether or not the property is being purchased solely or jointly with a spouse, civil partner or cohabitant.
Revenue Scotland Worked Example
Mr and Mrs Wainwright are married. Mr Wainwright owns a dwelling (which he purchased on his own before he was married) where the couple live as their main residence. Mrs Wainwright then buys a dwelling to be rented out.
At the end of the day that is the effective date of the transaction, Mrs Wainwright "owns" two dwellings; the newly purchased dwelling and, for the purposes of the ADS, is deemed to be the owner of her spouse's existing dwelling ("deemed ownership").
As Mrs Wainwright is not replacing her main residence, the ADS will apply.
2.13 Part 6 of Schedule 2A also deals with deemed ownership rules, what counts as a dwelling owned by a person for the purposes of the ADS and areas such as trustees and beneficiaries under certain trusts.
2.14 This first test means that the ADS needs to be considered in a range of transactions. These can include when:
- a second home or a buy to let property is purchased;
- someone buys their first main residence but also owns other residential property which is rented out, or has a share in an inherited residential property;
- a first-time buyer jointly buys with someone who already owns another residential property; or
- a new main residence is purchased before a previous main residence is sold.
The Second Test
2.15 If the first test is met, then the ADS will be due unless a main residence has been replaced.
2.16 Three conditions must be met for a main residence to have been replaced. These are that the buyer must have:
- disposed of the ownership of a dwelling during the 18 month period prior to the effective date of the purchase of the new property;
- lived in the dwelling sold as their only or main residence at some point during that preceding 18 month period; and
- on the effective date, intended to occupy the new property as their only or main residence.
2.17 In considering these conditions, a critical point is therefore that a dwelling must have been owned to count as a main residence for the purposes of the ADS legislation. This means, for example, that a property in which someone has lived as a tenant will not count.
Revenue Scotland Worked Example
Ben and Antonia live together in rented accommodation. Ben also owns a buy-to-let property.
They now decide to buy a new main residence whilst keeping Ben's buy-to-let property. At the end of the day that is the effective date of the transaction, Ben and Antonia will own two dwellings.
Although they have purchased a new main residence, they will not have disposed of the ownership of their previous main residence (as they lived in rented accommodation), therefore the ADS will apply.
2.18 Disposal of the ownership of a property will usually occur through its sale, but may occur in other ways. This may, for example, be through an individual selling their share in a residential property rather than the property itself.
2.19 For joint buyers, if more than one buyer is entitled to ownership of a new dwelling, and if more than one property is owned at the end of the effective date, then all buyers must satisfy the three conditions for replacing a main residence, or the ADS will apply. This is therefore different than the position for the first test.
2.20 This reflects provisions in the Act which apply to joint buyers in all circumstances, not just in relation to the ADS. These provide that any obligation or liability of either buyer in terms of the Act is an obligation of them both. The effect of this is that if more than one property is owned at the end of the day and only one buyer has replaced a previous main residence, then the ADS will be due.
2.21 There is however a specific relief from this requirement for certain spouses, civil partners, or cohabitants who purchase a new main residence jointly. This provides for a relief from the ADS in the event that either buyer can satisfy the first condition (by disposing of the ownership of a dwelling in the 18 month period) and both buyers can satisfy the second and third conditions. This means that both buyers must have lived in the dwelling sold as their only or main residence in the relevant 18 month period and, on the effective date, intend to occupy the new property as their only or main residence.
Revenue Scotland Worked Example
Bob and Babs are married and live in a marital home solely owned by Babs. Bob owns a separate dwelling which he lets out to a third party. Bob and Babs decide to sell Babs' property and jointly purchase a replacement main residence.
Bob will own, and Babs will be deemed to own, two dwellings at the end of the day that is the effective date of the transaction but only Babs will have sold a main residence within the previous 18 months. The ADS is not payable as the purchase qualifies for relief under Schedule 2A, paragraph 9A of the Act.
The Overall Position
2.22 In summary:
- For an individual buyer, if more than one property is owned at the end of the effective date (taking into account the economic unit provisions) and a main residence has not been replaced, then the ADS will be due.
- For joint buyers, if more than one property is owned at the end of the effective date by either buyer and both buyers have not replaced a main residence, then the ADS will be due.
- However, for joint buyers who are also spouses, civil partners or cohabitants in this situation, there is a relief from the requirement for both buyers to replace a main residence if:
- one buyer has replaced a previous main residence (by disposing of its ownership);
- both buyers had resided in the property as their only or main residence; and
- both buyers intend to occupy the new dwelling as their only or main residence.
Exceptions, Special Circumstances and Reliefs
Whilst not intended to be the focus of this call for views and evidence, the legislation sets out a range of other provisions which must be considering in determining whether the ADS is due. Commentary on this is set out below.
This is not exhaustive, and there are also, for example, specific rules regarding the interaction of the ADS and Multiple Dwellings Relief and the application of the ADS for mixed-use transactions.
The two tests described in this chapter do not apply to purchases by a non-individual, such as a company, investment trust or any other corporate entity.
They also do not apply to purchases made by an individual acting either as a sole trader or as a partner in a partnership, for whom the sole or main business activity is investing or dealing in property.
In these instances, where the transaction includes a residential property and the relevant consideration is £40,000 or more, the ADS will always apply and cannot be reclaimed.
This is intended to counter potential tax avoidance opportunities where an individual could purchase an additional dwelling via a company or business in order to avoid the ADS. The Scottish Government intends for this to remain the position.
The ADS will apply if an individual is making the acquisition as trustee under a settlement and, in relation to the dwelling that is or forms part of the subject matter of the transaction, there is no interested beneficiary.
There is an interested beneficiary if the beneficiary has, or will have, a relevant interest in the dwelling. A beneficiary has a relevant interest in a dwelling if the beneficiary is entitled to occupy the dwelling for life or income in respect of the dwelling. If this is the case, they are treated as 'the buyer' for the purposes of the ADS.
Where a person is the beneficiary under a bare trust, or a settlement under which the beneficiary has a relevant interest in the dwelling that forms part of the trust property, the beneficiary is treated as the owner of the dwelling.
A bare trust is a trust under which the property is held by the trustee for a person who is absolutely entitled as against the trustee.
Where a person owns a dwelling as trustee or a personal representative of another, the person is not treated to be the owner of the dwelling for the purposes of Schedule 2A.
Relief for six or more purchases
A full relief from ADS applies where six or more dwellings are purchased in a single transaction.