How will land and buildings transaction tax changes affect you and your clients?
By Chris Campbell, Head of Tax (Tax Practice and Owner Managed Business Taxes)
16 February 2024
Following the publication of draft legislation by the Scottish government, we look at the changes to land and buildings transaction tax from April 2024.
Following additional devolved powers to the Scottish parliament, land and buildings transaction tax (LBTT) replaced UK stamp duty land tax (SDLT) for property transactions in Scotland from 1 April 2015. SDLT continues to apply in England and Northern Ireland, whereas land transaction tax applies in Wales on property transactions from 1 April 2018.
In line with the position throughout the rest of the UK, the Scottish government introduced additional dwelling supplement (ADS) for residential property transactions in Scotland from 1 April 2016 where the consideration exceeds £40,000. ADS applies for second homes or buy-to-let purchases, however, the scope of the charge is based on whether the purchaser owns another residential property at the end of the day.
ADS was initially charged at a rate of 3% of the purchase price, increasing to 4% for transactions on or after 25 January 2019 and again to 6% of the purchase price for transactions on or after 16 December 2022. It is an additional LBTT charge, applied when someone already owns residential property (anywhere in the world) buys one in Scotland. And in the case of joint owners, where there’s more than one buyer and anyone in that party owns one or more properties (anywhere in the world). Special rules apply where there’s a replacement of a main residence (see below).
It is important to bear in mind that although non-residential LBTT rates apply for mixed transactions, ADS still applies in respect of the residential element of a mixed transaction. In addition, ADS also applies on the first purchase of by a company of residential property in Scotland, regardless of whether other residential property is owned.
We responded to a technical consultation on potential changes to LBTT in April 2023. The Scottish government has now published draft legislation on changes to LBTT and ADS from 1 April 2024.
Although these changes will largely be of interest to those who deal with LBTT returns (predominately the legal profession), they may also affect broader tax planning considerations, particularly with owner managed businesses. They will also be relevant to accountants and tax practitioners, particularly those advising clients on their business structure and wider tax planning.
ADS rules on replacement of main residence
Under the existing rules, subject to special rules for spouses, civil partners and co-habitants, an ADS refund can be claimed where the purchaser sells their only or main residence property within 18 months of the date of buying a new one. Providing that the property on which the ADS was paid has been used as the only or main residence of the purchaser. While there were special rules during the COVID-19 pandemic extending this to 36 months for purchases made between 24 September 2018 and 24 March 2020, the qualifying period then returned to 18 months.
However, there’s been a disparity between the other UK nations as a 36 month period already applies for SDLT in England and Northern Ireland and land transaction tax in Wales. The draft legislation will align Scotland with the rest of the UK and apply the 36 month period on a permanent basis.
Single economic unit
When determining whether ADS applies, it’s necessary to consider properties owned by the buyer's spouse or civil partner, cohabitant, as well as anyone under 16 who is a child of the buyer, the buyer’s spouse or civil partner or cohabitant. This is known as the single economic unit.
A drawback of the existing legislation is the inability for a refund of ADS on the subsequent disposal of the main residence in these circumstances to be actioned. For example, if one spouse owned the old residence and the other owned the new residence and ADS was paid, the current rules would not enable a claim to be made for the ADS even if the original main residence was sold within the 18 month time limit.
The good news is that the new draft legislation addresses this anomaly. It means that from 1 April 2024, where a property is sold by the buyer's spouse or civil partner, cohabitant, as well as an individual under 16 who is a child of the buyer, the buyer’s spouse or civil partner or cohabitant, this will be treated as having been sold by the buyer. This should make it possible for ADS to be reclaimed when the old residence is sold by the connected person to the buyer, now up to 36 months after the purchase of the new residence.
Joint buyers
The new draft legislation will extend relief for joint buyers if either of them disposes of their only or main residence, or where only one of them had an interest in the former main residence. The relevant period for an ADS refund is similarly extended to 36 months as above.
Other LBTT changes
The new draft legislation exempts local authorities from LBTT where exercising powers under section 2 of the Housing (Scotland) Act 1987 or where the transaction is funded with the assistance of a grant or other financial assistance under section 2 of the Housing (Scotland) Act 1988.
Where property is inherited, the new draft legislation provides ADS relief on a property which is inherited between the legal missives being concluded on the sale of the previous main residence and the legal missives being concluded on the purchase of the new main residence.
For couples who are married or in a civil partnership and divorce or separate, there will be a new provision to avoid the ADS charge that would otherwise arise when it is necessary for those spouses/civil partners to retain an interest in the previous main residence. This will apply where it is required by a court order to retain an interest in the previous main residence.
Under the deemed ownership provisions, the new draft legislation will ignore property shares for ADS purposes where the share value is less than £40,000.
Let us know your views
We welcome your views, which help inform our work on consultations or other tax-related matters. ICAS responds to many tax calls for evidence and consultations, as well as producing tax policy papers and reports. We also regularly attend meetings with HMRC at which service levels, delays and other issues are discussed, and we raise problems being encountered by members.
Please email tax@icas.com to share your insights and feedback.
