ADS And The Private Rented Sector - A Proposal For Growth

Whatever the intention behind the Additional Dwelling Supplement, it is not working to the benefit of all, discriminating against many in the private rented sector in Scotland.

We’d like to suggest a way to fix that:

Introducing Tenanted Property Relief

In this blog, we’re going to address the issue of ADS (Additional Dwelling Supplement) and the private rented sector, specifically as it applies to landlord to landlord sales with tenants in situ.

This is a genuine challenge for the PRS, and especially for smaller landlords, as the tax has to be paid in circumstances in which it is not serving its stated purpose.

We’ll start by looking at ADS, what it is and why it exists. Then we will look at the impact it has on tenanted sales and why its imposition is inappropriate. 

Finally we will propose an alternative approach, one that is more closely aligned with the needs of both tenants and the PRS itself.

As a company closely aligned with the PRS, and specifically the sale of tenanted properties, we have extensive experience of the issues involved. Hopefully our suggestions will find traction.

What, and why, is ADS?

The Additional Dwelling Supplement exists ostensibly to level the playing field between those seeking to buy property for rent and first time buyers.

The Scottish Government (SG) says the following regarding the levy:

“The Policy Note accompanying the LBTT Order explains that this increase in ADS to 8% is “intended to support the Scottish Government’s drive to protect opportunities for first-time buyers in Scotland, reinforcing the progressive approach in place for LBTT rates and bands.” (emphasis is ours).

So the intention is clear – give buyers in Scotland a fair chance to compete with property investors when buying their first home.

So far, so good.

When introduced, ADS was levied at 4% of the purchase price. By December 2024, that rate had doubled, via a sojourn at 6%, to 8% of the purchase price. This is in addition to applicable Land & Buildings Transaction Tax (LBTT).

In their publication, Annual Land and Buildings Transaction Tax statistics 2024 – 25, the SG lays out how much ADS has been levied and how much has been reclaimed.

In 2024 – 2025, the SG took £251.5m in ADS, with £52.6m being reclaimed (20.9%). While not all of that will be as a result of purchases by property investors, a large percentage will be, the rest being accounted for by the purchase of second homes.

However, to put this in context, Scotland’s public sector income for the same period was £91.4B; £87.3B without the contribution from the North Sea.

ADS therefore represents a very small percentage (0.28%) of Scotland’s national finances, and the amount reclaimed is substantially less than that.

This reclaimed amount is significant as it likely represents cases where ADS wasn’t applicable on property purchases, for instance where a single purchase was of 6 or more properties.

In such cases, Multiple Dwelling Relief (MDR) applies, favouring the purchase of property portfolios by investors intending to rent out those properties. This is significant.

The problems with ADS

It will come as no surprise that ADS is unpopular within the PRS; none of us, professionally or privately, want to pay more tax than is necessary.

However, given the disparity between house building and housing demand it is understandable that governments should take steps to ensure that everyone has a fair chance within the market.

ADS therefore becomes part of the cost of doing business for the PRS. If that were all it was, that might be acceptable, but the way the levy is applied has an effect on the market which may not have been appreciated when it was drafted.

The PRS in Scotland is still composed in large part of small landlords, owning between one and five properties.

There are many arguments about whether or not this is the best way to run the PRS, however this is not the place to exercise those, and this fact has to be taken as read.

Such landlords are unlikely to seek to add multiple properties to their investment portfolio, and will most likely never benefit from MDR. Larger investors can and do avail themselves of MDR.

This skews the market for suitable rental properties against the majority of landlords, which in itself may be deemed an odd approach for any government to take. Remember – ADS was intended to benefit first-time buyers.

Furthermore, ADS is applied to any purchase of residential property for more than £40,000 that isn’t your ‘only or main’ residence.

This means that included in this are transactions where a property and its sitting tenants are transferred from one landlord to another, normally as a result of a sale.

There is a strong, and we believe, persuasive argument that applying ADS in this instance is both wrong and counterproductive. Why?

ADS and tenants

Sales of tenanted properties nearly always happen between existing landlords, although aspiring landlords may also purchase such properties. Importantly, the property is not going to be available on the open market to residential buyers.

There is therefore no competition and therefore no need to level the playing field. The property isn’t available – it’s someone’s home – and that does not change as a result of the sale.

For a small landlord, the additional 8% levied on the purchase price may be a deal breaker and could result in the seller making the decision to end the tenancy and offer the property on the open market.

This is not the ‘Big Win’ some commentators believe it is; a family loses their home, to be replaced by another living in the same property. The statistics haven’t changed as a result – there is still a family looking for somewhere to live.

Moreover, the assumption is that everyone looking for a home wants to own that home. The continuing pressure on the PRS should give lie to that, and it is the case that many seeking accommodation prefer to rent, for various reasons.

Tenant satisfaction remains relatively high, and the majority of small landlords realise that a happy, stable tenant is key to their investment bearing fruit.

In the example above, had there been a successful in-situ sale, the tenants would have continued their residence, under the same terms as they had previously enjoyed. Instead, they face being homeless.

ADS and landlords

ADS is far from the only pressure on landlords, regulatory changes feature prominently as a topic for discussion and reason for making changes.

Although the Renters Rights Act features high in discussions, in Scotland many of those changes were already enacted in law, so it has had little effect north of the border.

Rising costs however are having a major impact on landlords and tenants alike, and anything which can be reasonably done to mitigate those costs should be considered.

Smaller landlords are more likely to be dissuaded from adding to the stock of available properties by the imposition of ADS, whilst larger landlords will not.

This particular playing field does demand to be levelled, not the competition between landlords and potential homeowners, but between small landlords who are the majority, and the larger landlords hold a majority of housing stock.

Tenanted Property Relief – TPR

This is why we are proposing that the Scottish Government should introduce legislation, primary or secondary, to redefine the scope of ADS. Its aims are simple and straightforward:

• To facilitate the landlord to landlord sale of already tenanted properties

• To support tenants by creating the circumstance most likely to see their tenancies continue uninterrupted by a sale

• To ensure that properties already within the PRS stay within the PRS and are not lost simply because taxation makes it difficult to find willing buyers.

We are not proposing that the SG remove ADS, much as we might wish to see that. If it is to be applied to those within the PRS, with the aim of leveling playing fields, that is what it should do.

Under this proposal, ADS would still be applied when an individual or corporate landlord is buying property offered on the open market, in circumstances where it is reasonable to expect competition for such properties.

However, once a property is firmly established within the PRS, with sitting tenants, the law should not actively dissuade existing small-scale landlords from acquiring more properties for their portfolio.

At present that is exactly what it does. Even if they are willing and able to accept the additional cost of ADS, unlike larger operations with greater buying power, they cannot avail themselves of MDR, creating a disparity of opportunity.

If this was intentional, the Scottish Government should publicly admit it, and clearly lay out their policy approach to the PRS. If not, it behoves them to make such amendments as necessary to resolve this invidious state of affairs.

Advice Thoughts from the property pros

That there is a housing crisis within Scotland is not up for debate, however hamstringing the majority of landlords is not a workable solution.

Ultimately, only sustained home building, both private and public can do that, and both are dependent upon government policy and intervention to substantially improve the current situation.

The proposed Tenanted Property Relief aims to remove unnecessary barriers to the sale and purchase of properties already within the PRS, and with tenants in-situ and established.

This is beneficial to tenants and landlords alike, while it has no impact whatsoever on the competition in the market for properties with vacant possession.

Tenants get the security of continued tenancy, landlords know that it will be easier for them to find a suitable buyer who will responsibly manage the property on behalf of their tenants.

The cost to the Scottish Government would be minimal in fiscal terms set against the opportunity to encourage and empower the PRS.

This proposal is simply aiming to correct an anomaly in the original regulations, and while there will be a cost to the public purse, the figures we have suggest that it will be inconsequential in practical terms.

We therefore urge the Scottish Government and MSPs across the parliament to do the right thing to help those on the frontline of the housing crisis to do their jobs without hindrance or financial punishment.

In summary…

History is strewn with unintended consequences and legislation and regulation are no exception.

Cynics might hold that the Scottish Government knew exactly what it was doing and chose to press on regardless, while those of a more forgiving nature may cite the frailty of human nature.

Either way, while there is an argument that ADS was introduced in Scotland with the best of intentions, that does not excuse persisting with it in its current form when it so demonstrably discriminates against the majority of landlords.

Moreover it harms the tenants those landlords serve, the very people the SG is sworn to serve.

Landlords enter and leave the PRS all the time for many reasons. A landlord selling their property can be a worrying time for tenants, better surely that they know another landlord can buy the property and run it to their benefit.

The alternative is uncertainty, disruption and potentially a notice to quit – selling a tenanted property is a legitimate reason to end a tenancy.

Introducing Tenanted Property Relief would be a positive step to indicate to landlords that the Scottish Government does indeed recognise their importance to housing in Scotland, and in doing so, correcting a historic wrong.

Written by Chris Wood, MD & Co-founder of Portolio, and Ross MacDonald, Director of Sales & Co-founder of Portolio

Get in touch on 07388 361 564 or email to [email protected]