What is Additional Dwelling Supplement (ADS) and How Does it Affect Property Investors?

If you’re new to investing in property, or haven’t purchased a property (whether it’s a buy-to-let or new home) since 2016, Additional Dwelling Supplement (ADS) may catch you out. 

Many landlords in Scotland assume ADS won’t apply to them, whilst others simply aren’t aware of it as an additional expense, naturally being more concerned with the Land and Buildings Transaction Tax (LBTT). 

It’s completely understandable, as when Additional Dwelling Supplement was first introduced back in 2016, it went by fairly unnoticed for a lot of people. 

So, for those unaware, finding out you suddenly have to pay a one-off tax as a percentage of any additional properties you purchase can be a bit of a surprise. 

That’s why I wanted to take the time to explain more about ADS, how it works, and how it can affect you as a property investor, so you can be fully prepared. 

What is Additional Dwelling Supplement? 

Additional Dwelling Supplement is a one-off tax of 4% (as of January 2019 – it was previously 3%) covering purchases of residential investment properties (such as buy-to-lets), or second homes, and applies to homes purchased for £40,000 or more. It’s charged on top of LBTT. 

To be clear, ADS is charged on the whole of the purchase price of the property, not just the first £40,000. 

There are some exemptions to ADS. The same exemptions that apply to LBTT also apply to any purchases of additional properties. 

Does Additional Dwelling Supplement apply to you? 

There are some examples of situations where investors can be really caught out by Additional Dwelling Supplement, so it could be worth reading on. 

For instance, you may be surprised to learn that it applies if: 

• You already own a residential property that’s located anywhere in the world – not just in Scotland 
• You haven’t bought your first property – you may have inherited it or been gifted it 
• Your spouse or partner already has a property, and you then decide to buy one together. It doesn’t matter that it is your first property, as it’s your wife’s second, and you’re seen as one unit for ADS purposes. 
• You buy an additional property through a private limited company or partnership; this does not make you exempt. 
• You’re purchasing less than six properties in one single transaction (more about ADS relief below)

It’s easy to see why some investors can get caught out by ADS. Below, I’ve gone on to explain how ADS is calculated, and how it affects you as an investor – including one way you can get relief from ADS… 

How does ADS affect you as a property investor?

It might help to take a look at some real-world examples to get a better handle of how ADS will affect your future property investments:

Let’s say you were purchasing a property of £250,000. ADS coming in at 4% would mean you can expect to pay £10,000 in addition to LBTT of £2,100. 

In contrast, if you purchased an investment property at £80,000, you would pay £3,200 of ADS (again, worked out at 4%), and LBTT would not apply. 

This is because LBTT only applies to properties that are purchased for £145,000 or more (although this has temporarily been increased to £250,000 until March 2021). You can find out more about LBTT and how it’s calculated via the official Scottish Government website.

In some scenarios, ADS can be reclaimed. Say someone were to buy a new home whilst their first home is still on the market. ADS would technically apply, and would be payable, but could be reclaimed once the first home is sold (as long as the sale happened within 18 months).

Relief from ADS when buying multiple properties

When you purchase six or more separate dwellings in one transaction – say, you were buying a property portfolio – you can take advantage of a specific ADS relief. Full relief is available on any transaction where section 59(8) LBTT(S)A 2013 applies. 

However, for this relief to work for you, it must be claimed in the first LBTT (Land and Buildings Transaction Tax) return made in relation to the transaction, or in a later amendment to that LBTT return, rather than any later ones. 

TIP: You can find out more about Additional Dwelling Supplement exemptions and relief via the official government website. 

Advice from the property pros 

Additional Dwelling Supplement can take some people off-guard, so it’s a good idea to read up and ensure you know exactly how much Additional Dwelling Supplement you’ll be liable to pay when investing in your next property. 

Another thing to take into consideration is if you’re planning on buying a new home and an investment property around the same time. This makes timing absolutely essential. Why? Well, because ADS only applies to the second property you purchase, you could limit the amount of ADS you have to pay by purchasing the more expensive one first. 

But remember, just like any other taxes, there is small print to follow. That’s why I recommend seeking professional advice from an accountant ahead of time, to either limit or circumnavigate the effects of any charges that’ll otherwise take you by surprise. 

In summary…

At 4% of purchase price – on top of LBTT – ADS can often be quite a nasty shock for property investors who have maybe been less aware of its introduction in 2016. 

And there are others who are often caught out by thinking they’re exempt (see above). Which is why we advise seeking professional advice from an accountant to ensure you’re fully prepared – and to ensure you can reclaim where appropriate. 

If you’d like to learn more about property investment, and how you can start receiving rental income on Day 1 with a tenanted property, why not get in touch today? 

We’re always happy to lend an ear, and provide you with some free, no-strings advice.

Written by Ross MacDonald, Director of Sales & Co-founder of Portolio

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