ADS rules must change to fo­cus on real tar­gets

Ad­di­tional tax for se­cond homes and buy-to-let pur­chases is caus­ing grief to those whose pre­vi­ous home sale is de­layed, says Michael Sheri­dan

The Scotsman - - Friends Of The Scotsman / Law And Legal Affairs -

It may be de­bat­able whether or not ris­ing house prices is a good thing but there is one per­son of in­flu­ence who clearly holds a huge, vested in­ter­est in ris­ing house prices, namely, the state. This is by virtue of the huge rake­off by way of Land and Build­ings Trans­fer Tax (LBTT) taken by the state when houses are bought and sold. This runs from 2 per cent of pur­chase price on house prices of £145,000 to 12 per cent on prices above £750,000. The higher the house price, the more money to gov­ern­ment.

This rake-off is in­flated by an el­e­ment known as Ad­di­tional Dwelling Sup­ple­ment (ADS) whereby an ad­di­tional 3 per cent (4 per cent from 25 Jan­uary) of the pur­chase price is payable to the state if the pur­chaser re­tains own­er­ship of his main res­i­dence so the pur­chase re­lates to a se­cond home or buy-to-let prop­erty. The stated pur­pose of ADS is to make res­i­den­tial prop­er­ties more eas­ily avail­able to first time pur­chasers by plac­ing se­cond home and buy-to-let pur­chasers at a dis­ad­van­tage in the mar­ket. It ap­pears to be quite in­ci­den­tal that it also ap­pro­pri­ates a sig­nif­i­cant amount of pri­vate wealth to the state.

How­ever, I have found the ma­jor­ity of clients who in­cur li­a­bil­ity for ADS are nei­ther se­cond home nor buy-to-let pur­chasers. The most com­mon vic­tim of ADS is the pur­chaser of a res­i­dence who has not been able to com­plete the sale of their pre­vi­ous home at the time of that pur­chase. This is a highly stress­ful, fi­nan­cially stretch­ing sit­u­a­tion made much worse by the ne­ces­sity of find­ing an ad­di­tional cash pay­ment of 3 or 4 per cent of the pur­chase price be­fore they can com­plete the pur­chase trans­ac­tion. In­deed, the un­cer­tain pos­si­bil­ity that the pur­chase trans­ac­tion might be­come sub­ject, at the last minute, to an ad­di­tional cost of sev­eral thou­sands of pounds is quite likely in many cases to jeop­ar­dise the set­tle­ment of the trans­ac­tion.

In such cases, the pay­ment of ADS may be re­cov­ered if the for­mer res­i­dence is sold within a cer­tain time af­ter the pur­chase trans­ac­tion. That, how­ever, does noth­ing to solve the im­me­di­ate cash­flow prob­lem caused by ADS. One would not like to think that un­scrupu­lous prac­ti­tion­ers, be­ing aware of the po­ten­tial ADS li­a­bil­ity, might threaten to de­lay the set­tle­ment of the sale to im­prove the terms of that trans­ac­tion on be­half of their own client, eg by the re­duc­tion (gazun­der­ing) of the price. How­ever, that must be a pos­si­bil­ity pro­moted by the float­ing risk of ADS. There ap­pears, there­fore, to be an ur­gent need for ADS rules to be tweaked so they fo­cus more pre­cisely upon the in­tended tar­gets of se­cond home and buy to let pur­chasers.

There may be many other un­in­tended vic­tims of this leg­is­la­tion. There is, for ex­am­ple, the not un­com­mon sit­u­a­tion of fam­ily break­down in which the par­ents of chil­dren be­come sep­a­rated. The main earner may wish to en­able his part­ner to re­tain the fam­ily home for the pur­pose of bring­ing up chil­dren of the mar­riage but that part­ner’s fi­nan­cial cir­cum­stances may be such that the main earner re­quires to re­tain re­spon­si­bil­ity for the mort­gage over that home, in which case they re­quire to re­tain joint own­er­ship of the prop­erty. He/she pro­poses to be nei­ther a se­cond home or a buy-to-let owner but is sub­stan­tially dis­ad­van­taged by ADS from ac­quir­ing own­er­ship of their own home. He/ she is, how­ever, now sub­ject to a fi­nan­cial in­duce­ment to bring about the sale of the fam­ily home to ac­quire a new res­i­dence, free from the cost of ADS.

In such cases, the un­in­tended vic­tims of the leg­is­la­tion might in­clude the in­no­cent chil­dren whose par­ents sim­ply can­not af­ford to meet the costs of the gov­ern­ment’s mea­sures against se­cond home and buy-to-let prop­erty own­ers

On read­ing the back­ground to this leg­is­la­tion it seems that it may have been cre­ated as a re­ac­tion to sim­i­lar pro­vi­sions in Eng­land and, in par­tic­u­lar, to pre­vent the ac­qui­si­tion in Scot­land of se­cond homes and buy-to-let prop­er­ties be­com­ing par­tic­u­larly at­trac­tive to pur­chasers from Eng­land who would be dis­suaded by those pro­vi­sions from mak­ing such pur­chases in Eng­land. That may be un­der­stand­able but nev­er­the­less serves to un­der­line ne­ces­sity of amend­ing the leg­is­la­tion so that it is truly di­rected at se­cond home and buy-to-let pur­chasers. Michael Sheri­dan is Sec­re­tary of the Scot­tish Law Agents’ So­ci­ety

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