The land and buildings transaction tax (LBTT) regime was introduced in Scotland in April 2015, replacing the previous stamp duty land tax (SDLT) regime. LBTT is a tax which is payable in connection with (a) the acquisition of Scottish land and buildings; and (b) leases of Scottish commercial premises. In a purchase transaction, it is the purchaser who is liable to pay LBTT. In a lease transaction, it is the tenant. LBTT is administered by the Scottish tax authority, Revenue Scotland.

In April 2016, the Scottish Government introduced an additional dwelling supplement (ADS) to the LBTT regime. The ADS was introduced in Scotland in response to the announcement of the introduction of a broadly equivalent additional SDLT charge in England.

As the name suggests, the ADS is an extra tax payment which is payable (a) in addition to the standard LBTT charge; and (b) in connection with purchases of dwellings (broadly meaning residential properties). As the ADS has been around for a while now, many people will have heard of it and be aware that it is an extra tax charge on the purchase by individuals of additional residential properties, such as second homes and buy-to-let properties. What is perhaps not so well known is that the ADS may also be payable by non-individuals (i.e. corporate entities) when they acquire residential property, even if doing so for the very first time.

The ADS rules for non-individuals

If the purchaser of a dwelling is an individual, the ADS will only apply if the purchase results in the purchaser owning more than one dwelling. However, if the purchaser of a dwelling is not an individual (i.e. if it is a corporate entity, such as a company), the "more than one dwelling" rule does not apply.

This means that the ADS applies to the first and every subsequent acquisition by a non-individual of a Scottish dwelling (other than certain trust transactions and subject to the minimum £40,000 price mentioned below and any available tax reliefs). This rule exists to prevent tax avoidance, as otherwise an individual could set up a company to buy a second dwelling, to avoid payment of the ADS. However, it may also affect corporate entities who acquire residential property for development or private letting purposes, even if they do not already own any residential property.

It is important to note that the "more than one dwelling" rule also does not apply if the purchaser is an individual who is acquiring a residential property either (a) in the course of a property investment/dealing business which is carried on by the individual as a sole trader or partnership; or (b) in certain cases, as a trustee of a settlement. Again, this is to prevent individuals from using a business or opaque trust to purchase an additional dwelling in order to avoid the ADS.

How much is the ADS?

The ADS is only applicable if the "relevant consideration" for the transaction is £40,000 or more. The relevant consideration is usually the purchase price.

The ADS charge is currently 4% of the full relevant consideration for the transaction. The ADS is a slab tax rather than a tiered one (i.e. it is not split into progressive rates and bands in the way that the standard LBTT charge is) and there is no nil rate band for ADS. So, to give an example, if a Scottish residential property is being acquired for £500,000 and the ADS applies, the LBTT charge will be:

The standard LBTT reliefs (e.g. group relief, charities relief etc) also extend to the ADS, so if a transaction is exempt from LBTT because a relief is being claimed, no ADS will be payable. However, if a relief ends up being withdrawn, the ADS could become payable.

Potential application of ADS to non-residential property transactions

It is worth noting that, although the ADS is a supplement payable in connection with residential property, it can also apply to transactions that are deemed (for LBTT purposes) to be non-residential transactions on the basis that they include both residential and non-residential property. This could apply in the case of the purchase of mixed-use property (e.g. the purchase of a shop and a residential flat above it), or where there are "linked transactions" involving both residential and non-residential properties. "Linked transactions" are transactions which form part of a single scheme, arrangement or series of transactions between connected persons, and are governed by special anti-avoidance rules to stop what is in reality one transaction being split into several smaller transactions to reduce the LBTT liability.

In such cases, the purchaser will need to inform Revenue Scotland what apportionment of the total price of the transaction(s) is applicable to the residential element(s), and the ADS will be payable on the apportioned amount. The apportionment must be calculated on a just and reasonable basis.

It is also important to be aware that:

• an LBTT relief known as "multiple dwellings relief" may be available if two or more Scottish dwellings are being acquired as part of a single transaction; and
• there are particular rules which apply when a portfolio of six or more separate Scottish dwellings are being acquired in a single transaction. This is treated for LBTT purposes as a non-residential property transaction (even though the subject matter is residential) and, as long as the acquisitions genuinely do form part of a single transaction, the ADS should not apply.

There are complex provisions about how the ADS and multiple dwellings/portfolio rules interact. There are also detailed rules and restrictions on exactly what qualifies as a "dwelling" for LBTT purposes.

We can help

The ADS rules are complex. There are many traps for the unwary, and penalties and interest may be payable on late ADS payments, so please get in touch with us for help and advice.