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

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