In a recent first tier tribunal case, McCarter vs Revenue Scotland 2023, a Scottish taxpayer was hit with an unexpected Additional Dwelling Supplement (ADS) charge for not adhering to the ‘replacement of main residence’ rule. The findings of the tribunal serve as a warning to homeowners who are looking to replace their second home but aren’t intending to move into their new home straightaway.
In this article, we’ll delve into what the ADS is and the conditions for relief where there’s a second home.
What is the Additional Dwelling Supplement?
The Additional Dwelling Supplement (ADS) is a tax introduced by the Scottish Government to curb the growth of the second home market (a similar charge was adopted by the UK government). It applies to properties that aren’t the buyer’s primary residence, such as second homes and buy-to-let investments. However, the ADS can be refunded in situations where a person replaces their main residence within a particular timeframe.
How does it work?
The ADS is levied on top of the standard Land and Buildings Transaction Tax (LBTT) in Scotland. For transactions on or after 16 December 2022, the ADS in Scotland is 6% of the purchase price of the property, or 4% where the property was purchased between 25 January 2019 and 15 December 2022. The ADS will not apply where the value of the property is below £40,000.
The ADS must be paid within 30 days of the effective date of the transaction.
Exemption for replacement of main residence
If a person is purchasing a new home while intending to sell or has sold their existing primary residence, they may be exempt from the ADS. However, for the exemption to apply, the following conditions must be met:
- Timing and occupation — the replacement property must be purchased within 18 months from the sale of the original main residence, and the property must be the only or main residence of the buyer in the 18-month period.
- Intent — the buyer must have the intention of using the new property as their only or main residence from when it is purchased. Therefore, the property cannot be purchased with a view to using it as a second home or for investment purposes.
- Sale of previous main residence — the buyer must have sold their previous main residence within the 18-month period.
It’s worth noting that in cases where a person is in the process of selling their main residence, they’ll be required to pay the ADS upfront. However, this can be recovered once the relevant conditions above have been met — usually when the old main residence is sold.
Pitfalls
Although most homeowners will be able to move into their new homes from the date of purchase and sell their old home within 18 months, satisfying the conditions above — this will not be the case for everyone. For instance, a person may not be able to move into their new home if a property requires renovations.
In the case of McCarter vs Revenue Scotland, the taxpayer’s solicitor made a request for the ADS to be repaid to Mr McCarter after his original main residence was sold within the 18-month period.
However, after Revenue Scotland made further enquiries about the claim, it transpired that Mr McCarter did not satisfy the timing and occupation condition above. This was because Mr McCarter could not occupy the property as his main residence due to extenuating circumstances.
As such, Mr McCarter took the case to tribunal on the basis that he had a reasonable excuse for not occupying the property. Unfortunately, despite the tribunal sympathising with Mr McCarter and acknowledging that his actions were reasonable, they were steadfast in their decision that not all conditions had been met for a repayment of ADS and dismissed the case.
Takeaway message
This case serves as a reminder that the buyer must have the intention of using the new property as their only or main residence from when it is purchased. Therefore, the property cannot be purchased with a view to using it as a second home or for investment purposes.
Author: Joe McKillion, CT: Personal Tax
