Stamp duty land tax (SDLT) is a really good example of a tax that has been properly devolved. In Wales there is land transaction tax (LTT), and in Scotland land and buildings transaction tax (LBTT). Differences between the taxes go beyond the rates charged – there are also some fundamental differences in how and when the taxes apply.

One key area of interest to those entering residential property transactions concerns when higher rates are payable on the acquisition of a second property. The Scottish government has been consulting on some fundamental changes to when it will apply its version of this charge: the additional dwelling supplement (ADS). Will this lead to closer alignment or greater divergence between the taxes?

Policy background

The SDLT surcharge, also known as higher rates for additional dwellings (HRAD), was introduced from 1 April 2016. It was announced as one of five measures aimed at supporting home ownership at the Spending Review and Autumn Statement 2015. HRAD is an effective surcharge on residential property purchases by companies and individuals who already own a dwelling and are not replacing their main residence.

To prevent distortion in the Scottish residential property market, the Scottish government introduced its version of HRAD, the ADS, also with effect from 1 April 2016. When LTT was introduced in Wales from 1 April 2018, it also included higher residential rates.

Differences in rates and structure

HRAD has always been an additional three percentage points on each of the existing residential rates of SDLT, and applies like a surcharge. Technically, the rate thresholds for HRAD could vary from those that generally apply to residential property as HRAD has its own rate table. However, the thresholds have always been consistent with the residential property bands. This means that second-home buyers benefitted from the COVID-19 SDLT holiday and are currently able to pay a 3% rate on residential property purchases of up to £250,000.

In Scotland, ADS is a surcharge payable in addition to the residential rates. Unlike SDLT and LTT, ADS is also payable on the residential element of a mixed-property purchase (ie, where a property has both residential and non-residential elements such as a pub with a flat above). The ADS rate has increased over time. It was 3% of the purchase price for transactions prior to 25 January 2019, 4% for transactions on or after 25 January 2019 and before 16 December 2022, and 6% for transactions on or after 16 December 2022.

In Wales, the higher residential rates were initially 3% higher than the main residential rates. Like HRAD, the LTT higher rates are contained in a separate table. Over time, the Welsh government has not maintained parity between the main rate and the higher rates. When the LTT rate thresholds were temporarily increased for residential property purchases during the COVID-19 pandemic and again from 10 October 2022, the thresholds did not change for higher rate transactions. LTT higher rates were increased for transactions on or after 22 December 2020. The rates now range from 4% to 16%.

Differences in application

The rules are often the subject of articles highlighting ‘traps for the unwary’ and cases concerning perceived unfairness of how the charges apply. Unfortunately, the Tribunals have no discretion to override what the legislation says.

Replacement of main residence

All three codes contain a carve-out for the replacement of a main residence. This means that the higher rates do not apply if more than one residential property is held and the newly acquired property is replacing a residence that has already been sold. Alternatively, a refund can be claimed once the former residence has been sold where there is an overlap in ownership.

A time limit applies. A key difference for Scottish purchasers is that the period is 18 months whereas in England, Northern Ireland and Wales the time limit is three years. The Scottish government’s consultation proposes to extend the time limit in Scotland to three years.

The LTT rules in Wales also contain the concept of ‘intermediate transactions’. This is designed to counter avoidance of LTT by sequencing transactions in a way that might otherwise escape charge at the higher rates.

Inherited property

For the purposes of determining whether another dwelling is held at the time of a residential property purchase, both the SDLT rules in England and Northern Ireland and the LTT rules in Wales ignore certain inherited property interests. A holding of a 50% or smaller beneficial interest in a dwelling anywhere in the world that was inherited within the last three years is disregarded.

There is currently no equivalent exclusion from the ADS in Scotland. However, to address unfairness of an unexpected ADS charge arising where another property is inherited after the conclusion of missives (exchange) and the effective date of the transaction (completion), the Scottish government intends to introduce a relief for beneficiaries that inherit a property during that window.

Existing interests in dwellings

In England, Northern Ireland, Scotland and Wales, the higher rates apply to individual purchasers if they own, or are treated as owning, another dwelling anywhere in the world. However, interests with a market value of less than £40,000 are ignored. 

There is a fundamental difference in how this rule applies to existing jointly-held property. The ADS legislation deems each person to own 100% of the property. Therefore, if an existing property is worth more than £40,000, the ADS applies, regardless of the value of the individual’s share in the existing dwelling.

By contrast, the other codes only impose the higher rates if the person’s share in the jointly held property is worth £40,000 or more. The LTT rules even spell out how to value the beneficial shares of joint tenants and tenants in common. Taking an example from HMRC’s Stamp Duty Land Tax Manual, an interest in a buy-to-let property worth £150,000 owned jointly by five friends would be ignored for the purposes of HRAD as the individual’s share is worth £30,000.

The Scottish government plans to amend the ADS legislation to deem that a person is not the owner of the dwelling if their share in the ownership interest is worth less than £40,000.

Interests retained on divorce or separation

The SDLT rules were amended with effect from 22 November 2017 to prevent HRAD from applying where a court order on divorce or separation stipulates that a person has to retain an interest in a former main residence and it remains the main residence of their former spouse or civil partner. The LTT rules for higher rate transactions in Wales have included a similar exemption from the outset.

The Scottish Government intends to bring forward a similar exemption from the ADS.

Joint purchasers

The rules become complicated where there are joint purchasers. The general premise is that the tests must be considered for each buyer. The circumstances of one joint buyer can mean that the higher rates apply to the whole transaction.

However, the replacement of a main residence test can be met by spouses and civil partners buying a new main residence together even if the former main residence was only held by one party. To qualify, both purchasers need to have lived in both the new and the former dwelling as their main residence. In Scotland, this also extends to cohabitees living together as a married couple.

The Scottish government is planning further changes. Where there are joint buyers and only one has a former main residence to dispose of and the other(s) own no other property, it will be possible to claim a repayment of the ADS if all joint buyers occupy the new property as their main residence. 

Other planned changes in Scotland

The ADS is unique in having an ‘economic unit’ provision. This means that married couples, those in a civil partnership and cohabitants, along with their dependant children (children under 16, including adopted children), are treated as one economic unit for the purposes of determining how many properties a buyer owns at the end of the day that is the effective date of the transaction. The Scottish government plans to make a change so that the disposal of a property in which a buyer is deemed to have an interest solely by virtue of the economic unit provisions will be treated as a disposal by the buyer when determining ADS liability.

The final planned change extends beyond ADS. The Scottish government intends to provide relief from LBTT and ADS for local authorities where a purchase is funded under s2, Housing (Scotland) Act 1988.

Spot the difference

Although the policy intention behind the higher rates is consistent, there remain numerous differences. In addition to the above, other variations in treatment include:

• purchases of six or more dwellings; 
• dwellings purchased by sole traders and partnerships;
• linked transactions;
• the definition of an unencumbered dwelling interest;
• communal accommodation;
• the treatment of subsidiary dwellings (granny annexes); and
• alternative property finance.

It is essential to analyse a property transaction based on the correct legislation, rather than assuming that all regimes operate in the same way.

Lindsey Wicks, Technical Editor, ICAEW

Stamp Taxes 2022/23 (bloomsburyprofessionalonline.com)