More flexibility needed to ensure LBTT works as intended

They are among suggestions put forward by the Chartered Institute of Taxation (CIOT) in its response to a Scottish Government consultation on plans to reform the Land and Buildings Transaction Tax (LBTT) Additional Dwelling Supplement (ADS).

ADS was introduced in 2016 as a way of making it more expensive for taxpayers to own more than one property, such as buy-to-let or second homes. It is paid in addition to standard LBTT and is charged at 4% of the total selling price.

But the way it currently operates means that some taxpayers are being charged ADS, despite it being clear that they are not accumulating additional properties.

The CIOT highlighted a recent tribunal case involving an army doctor who was required to pay a £22,000 ADS charge because he had been posted overseas by the military and was unable to demonstrate that he had lived in his previous main home prior to buying a new one.

The Institute has also highlighted cases involving divorce or separation, warning that the way ADS rules are applied could make it harder for one partner to buy a new property while retaining an ownership in the home they have left because the extra tax involved may make a purchase prohibitive.

To address this, the CIOT has recommended that Scottish ministers consider mirroring an HMRC power that allows any extra tax owed to be waived in special circumstances. This power might be particularly useful in cases of divorce or separation involving children or domestic violence.

The CIOT has also recommended ministers double the time that house buyers have to sell their old main residence after buying a new one, from 18 months to three years.

This would bring Scottish legislation into line with England and Wales and make permanent a temporary measure introduced in Scotland at the start of the coronavirus pandemic.

Currently, if someone was to buy a new home at the average Scottish house price but was then unable to sell their old one within 18 months, they would be required to pay an additional £7,219 in ADS in addition to the standard £709 LBTT charge.

In 2020/21, around a fifth of residential property transactions where ADS was due involved the buyer indicating an intention to reclaim the extra tax paid.

John Cullinane, CIOT Director of Public Policy, said:

“ADS was intended to be paid by those buying second homes and to discourage the accumulation of property, but the way the law has been written has meant that some taxpayers may find themselves liable for an extra tax charge they hadn’t been expecting.

“The recent tribunal case involving a military doctor who was unable to demonstrate that he met the criteria for claiming a refund of ADS suggests that it would be helpful if there was greater flexibility and discretion in the way the law is applied so that exceptional circumstances can be taken into consideration.

“It is also unlikely to open the floodgates to repayment claims and a loss of revenue given that each case would need to be considered on its individual merits, rather than a one-size fits all approach”.

On extending the time available for buyers to complete the sale of their old property and claim an ADS refund, John Cullinane added:

“The current 18-month timeframe is unlikely to provide a sufficient window in all circumstances for a taxpayer to buy a new home and then sell their old one.

“It is less generous than the rules that exist in other parts of the UK and that in turn could lead to confusion and uncertainty when cross-border chains of property sales are involved.

“Having a consistent approach would help to provide taxpayers with greater certainty and lessen their chances of being caught out by a tax charge they may not have been expecting when they set out to buy a new home”.

Notes for editors

1. The CIOT’s response can be read here.

2. On transactions above £40,000.

3. Paragraph 8(1) Schedule 2A of the Land and Buildings Transaction Tax Act states that repayment of ADS can be made when three conditions are met: (1). The previous home is sold within 18 months of the purchase of a new home; (2). That the home being replaced was the buyer’s ‘only or main’ residence in the 18 months leading up to the sale and; (c). the home was their only or main residence.

In the case of Dr Andrew Christie and Revenue Scotland, the Tax Chamber First-tier Tribunal for Scotland stated that “it is not in dispute that in the first instance Dr Christie was liable for both the LBTT and the ADS. The issue is simply whether the ADS is repayable”.

They went on to say that “From the wording of the legislation it is clear that it was the Scottish Parliament’s intention that the ADS is only repayable in the limited circumstances set out in paragraph 8(1) of Schedule 2A” and that “All three conditions must be met”.

The Tribunal stated that “the ADS can only be repaid in very limited circumstances” as set out in the legislation and that it “cannot do anything other than uphold Revenue Scotland’s decision” that Dr Christie is liable for ADS.

The decision can be read on the Tax Tribunal website here.

4. The Coronavirus (Scotland) (No.2) Act 2020 extended the period available for eligible buyers to claim a refund of ADS from 18 months to three years provided they had bought their new home between 24 September 2018 and 24 March 2020.

5. If someone buys a property costing the average Scottish house price of £180,485 (December 2021), they would be liable to pay £709 in LBTT. If they are replacing their previous main residence, but can’t sell it in the 18 months from the date they bought their new home, they would also have to pay an additional £7,219 in ADS, in addition to the regular LBTT charge. The same would be true if the property was being purchased as a second or buy-to-let property.

Sources – HM Land Registry UK House Price Index Scotland: December 2021 /  Revenue Scotland LBTT calculator.

6. Figure 20 - https://www.revenue.scot/news-publications/publications/statistics/annual-summary-trends-devolved-taxes-2020-2021 (Estimated number of residential conveyance returns with ADS declared due by local authority, intention to reclaim ADS and year). Of 20,810 house transactions involving ADS, of which 4,260 indicated an intention to submit a claim for repayment.