How to Avoid ADS is probably one of the questions I get asked the most!
Before we get into ways to get relief from this tax, we need to understand what taxes you will pay on an investment property and why.
When you purchase a residential property in Scotland and you already own one or more residential properties anywhere else in the world, you will most likely need to pay an Additional Dwelling Supplement (ADS) in addition to the Land and Buildings Transaction Tax (LBTT). Find out more about ADS and LBTT Tax here.
For transactions on or after 25 January 2019, this is set at 4% of the ‘relevant consideration’ (usually the purchase price).
If you are purchasing an additional property or adding to your existing portfolio, this is a substantial additional cost that you need to account for. The only relief from this if you are buying single units, is that the value needs to be £40,000 or more. This is why you will see so many sales prices at £39,999 on The Registers of Scotland!
How to avoid ADS
If you are buying a single additional property or a small portfolio of properties where the transaction amount is £40,000 or more then there is no way to avoid paying the ADS.
There is, however, relief from Additional Dwelling Supplement when six or more separate dwellings are the subject of a single transaction. In this situation, they are treated as non-residential property and therefore the ADS is zero!
This is where portfolio purchases stand out from the crowd.
If you were to purchase 10 properties, each valued at £100,000 as single unit transactions you would need to pay 4% ADS on each purchase.
4% of £100,000 = £4,000
£4,000 x 10 properties = £40,000
If you were to purchase the same 10 properties in a single portfolio transaction, you would qualify for ADS relief and there would be no extra tax to pay.
In this example, purchasing as a portfolio provides instant savings of £40,000!
Additional Dwelling Supplement can make or break a deal. It’s not a form of investment that you are going to get any returns from, it’s a one-off payment and unless you fall under the categories of exemption, once it leaves your bank account, it’s gone for good.
If you were looking for an investment purchase and were offered an additional 4% off the purchase price you would jump on the opportunity, this is exactly what you can do with a portfolio purchase of 6+ properties and the best thing is, there is no negotiating needed! Find out more about buying a portfolio with us here.
As always, please seek professional advice on this matter from your Solicitor or Accountant as they will be best placed to advise based on your individual circumstances.