Leaving property to younger family members can be a wonderful gift, but be aware of potential complications with Scotland's Additional Dwelling Supplement.
The Scottish Government has acknowledged that aspects of its Additional Dwelling Supplement (ADS) are unclear and need to be amended. It’s a welcome admission but until new legislation is passed, the current drafting weaknesses may affect people leaving or inheriting a property in a Will.
The good news is that inheriting a property does not give rise to an ADS bill. However, there can be an ADS shock when someone inherits a home, or share in it, and then buys another property.
A common scenario
Let’s say a grandparent leaves their cottage in the Highlands to their three grandchildren, all in their 20s. Much as they love it, none of the three would live in it for themselves, so they let it or keep it for holidays.
One of them then decides to buy their first flat. Having never bought property before, they see themselves as a first-time buyer, but this is where the ADS shock can hit. Because they own a share of the cottage, there will likely be an ADS liability on the new flat – the 6% ADS means this could be £9,000 on a flat costing £150,000. They may also lose their entitlement to First-Time Buyer relief on Land and Buildings Transaction Tax (LBTT).
Change is needed
The ADS legislation is unclear about some aspects of owning inherited dwellings, as the Scottish Government has acknowledged.
Another less-than-ideal element of the current law around inherited property is that even if someone owns just 10% of the property, they are deemed to own the whole property for the purpose of ADS.
At the time of writing, we’re still waiting for draft legislation to improve matters. In the meantime, anyone potentially affected should note the issues and take good advice.
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