ADS on Sales of Tenanted Property - Unfair or the New Normal?

Additional Dwellings Supplement, or ADS, has emerged as one of the persistent bugbears for buy-to-let landlords and property investors under the current Scottish government.

Often cited as protecting the property market for first-time buyers, the government increases it with the regularity and apparent lack of concern that the rest of us apply to making a cup of tea.

This has led to a great gnashing of teeth and many column-inches of complaint from those who represent the buy-to-let sector. The Scottish Association of Landlords  (SAL) is campaigning to have it removed from in situ sales.

This is a position that we at Portolio strongly support; we’ll explain why below.

But… Is it really an untenable burden on investors or has it now become just another cost of doing business? With decades of experience in the buy-to-let market, we’re going to look at ADS, and whether it really is unsupportable.

ADS – What is it, and why is it?

Introduced in 2016, the stated aim of ADS was to level the property ‘playing field’ by making it more expensive for those who already owned a main residence to purchase additional properties, thereby benefitting first-time buyers.

In the main, additional properties are bought as investment opportunities, commonly buy-to-let, although obviously there are those who are simply fortunate enough to have the means to buy an additional home.

Initially set at 3% of the full purchase price – the cost of ADS ballooned to its current rate of 8% in December 2024. Unlike Land and Buildings Transaction Tax (LBTT), ADS is payable on the full purchase price of the property.

While protecting first-time buyers was the principle stated aim of the tax, the Scottish government made no bones about the value of ADS in raising additional revenue.

There are exceptions; single transactions involving 6 or more properties are exempt from the tax and refunds of ADS are possible in certain circumstances, however it has proved to be an excellent ‘sticky tax’ in terms of generating revenue.

Has ADS had the intended effect?

Well – no, not really, unless the actual intended effect was to swell government coffers.

We’ve had to dust off our time machine to bring you this link from 2017, which does an excellent job of highlighting the sorts of problems encountered by non-investors as a result of ADS.

More recently, the Law Society of Scotland wrote an article throwing light on other, unexpected cases where ADS could, and would, be applied. It’s telling that only one scenario involves a rental property.

How has ADS affected the buy-to-let market?

In a nutshell, it’s made it more expensive to buy investment properties if you already own a property, a state of affairs that applies to nearly all property investors unless they live in rented property themselves.

The additional cost of ADS is going to get rolled into their cost calculation and will be reflected in rents, driving them up further.

Unfortunately there are no figures available to show whether or not the advent of ADS in 2016, and its subsequent increases, have affected the number of property investment transactions being completed in Scotland.

Since ADS is applied to the whole price of the property, it is not an unreasonable inference that more expensive properties in the private rented sector are more affected.

Properties which are currently tenanted as HMOs are likely to have higher purchase prices, both because they tend to be larger and also because, on paper at least, they represent better investment opportunities.

Accordingly, having to add an additional 8% of the price onto the transaction is likely to dissuade some potential investors who may seek more cost-effective options.

This could have unintended consequences in areas which rely more heavily on the PRS, such as university cities. However, given the number of unintended effects of this legislation as outlined above, perhaps this is to be expected.

Advice from the property pros

While few of us dispute the social value and necessity of taxes, that doesn’t mean that we enjoy paying them or that they are always the best solution to a perceived problem.

Overall the effect of ADS on sales of tenanted properties is hard to gauge.

Your answer may depend in part on your financial standing. For those hoping to enter the private rented sector, cost often matters. They may therefore be moved to seek cheaper to minimise the cost of ADS.

For larger investors, those with either substantial lines of credit or healthy capital resources, ADS, while unwelcome, is affordable and its cost will form merely part of their overall cost-benefit calculations when considering property acquisition.

We would remind you of the abolition of MIRAS (mortgage interest relief at source) by Gordon Brown in 2000. At the time this was seen as the deathknell of the buy-to-let market, in fact time has proven otherwise.

While undoubtedly some landlords and investors left the market as a result, the market itself continued and indeed boomed, despite financial crises and a global pandemic.

We’re not for a moment suggesting that it’s been nothing but milk and honey for the sector, but it persists, despite all the demands made on it.

ADS on tenanted sales is, arguably, just another of these demands, and the sector has adapted. Investors are looking at portfolio sales, where ADS doesn’t apply and even at purchasing property companies outright as options.

However…

There is also a very good argument that making landlord to landlord sales more attractive will protect tenants’ rights and the rental supply. Removing ADS on the sale of tenanted property is one such incentive. This is SAL’s position.

If this were done, rather than finding their lives uprooted, and the likelihood of the property leaving the rental pool altogether, tenants can continue to enjoy their home with minimal disruption and the property is not lost to future tenants.

In summary…

Given the apparent intransigence of the Scottish Government as far as helping the PRS, despite the well-documented shortfall in housing stock, it would be sensible to assume that ADS on tenanted sales will remain for the foreseeable future.

In that respect we think that it’s wise to treat it as just another cost of doing business and approach the market accordingly.

With extensive experience in the buy-to-let market, we would encourage you to reach out and make an appointment if you’re considering investing in the private rented sector.

We can discuss your circumstances, your aims and goals, and help you to find solutions which work for you.

As always, thank you for reading!

Written by Chris Wood, MD & Founder of Portolio

Get in touch on 07812 164 842 or email [email protected]