Tax charges on second properties

Claire Maxwell, Tax Senior Manager at Johnston Carmichael, takes a look at the tax charges you may face if you're purchasing a second property.

Owning a second property as a holiday home or as a landlord has long been attractive to investors. If you are tempted to join the ranks of second home owners, you need to be clear on the tax charges you could face on purchasing your property.

Land and Buildings Transaction Tax (LBTT)

Land and Buildings Transaction Tax (LBTT) replaced Stamp Duty in Scotland in April 2015 and bumped up the tax due on the acquisition of property for many of us. LBTT is payable by anyone purchasing a property in Scotland where the purchase price exceeds £145,000.

A further blow arrived for second home owners from April 2016 with the introduction of the Additional Dwelling Supplement (ADS) which is payable in addition to the normal LBTT charges. The ADS targets the second home and lettings property market and applies on purchases by individuals of a second residential property with a value over £40,000.

Increase in ADS charge

In a move that was not unexpected and in a break from the rest of the UK, the Scottish Government recently increased the ADS charge on the purchase of residential property in Scotland from 3% to 4%.

The ADS charge can be hefty as it applies to the total purchase price, and needs to be factored into your financial considerations from the start. As an example, ADS on a property purchased for £250,000 will be £10,000, in addition to the £2,100 normal LBTT charge.

Relief from ADS charge

Purchases of residential property by companies or trusts do not escape the ADS charge, with the 4% ADS charge in force on any residential property purchase. But there is some good news, there are reliefs and exemptions available and there is some planning that can be done around this tax.

Gifts of property can escape ADS as well as inherited properties, so planning around family ownership of property can be worthwhile. There is relief available to spouses, civil partners and cohabitants who perhaps both have an existing property in the picture, but wish to purchase a main residence they will both live in. Timings and circumstances are crucial here and need reviewed and agreed before entering into any purchase. Sharing property ownership between friends or family can be useful too, as this can potentially be structured to fall under the £40,000 ADS limit. If you are thinking of multiple property purchases, there is relief from ADS for the purchase of six or more properties in a single or linked purchase as this type of purchase falls to be treated as non-residential.

The rules around LBTT and ADS are vast and complex and an unexpected ADS bill can add a staggering cost to your property purchase. Proceed with caution and a clear understanding of the cost and rules that affect your circumstances.

Find out more about property tax. Visit ESPC Lettings for more information on the buy-to-let market.