Property Taxation: a must read

Property Taxation: A Must Read

An interactive guide to property taxation.

Introduction

Taxing property when it is purchased is an unfair method of taxation. No matter what is said by prospective governments, when in power, they tax property just at the point when people need all the money they can lay their hands on.

Especially in current times, when public money is short, the application of the taxation is wide ranging and indiscriminate; it is argued that this is to avoid abuse but practice suggests that taxation is formulated in a way to extract money from the public. There are two really important facets to this:

property taxation is extremely easy for governments to impose and enforce because title registration easily identifies property transactions; and
it is a criminal act to avoid paying the correct amount of tax. Coupled with the fact that property taxation is aggressively monitored by the authorities, it cannot be emphasised enough that it is your responsibility to make sure that you are paying the correct amount of tax. Furthermore it is an obligation on the part of solicitors (again backed up by criminal sanctions) to ensure that the tax is being identified and paid.

This interactive explainer assists you in understanding what taxes may apply and introduces you to McVey and Murricane's innovative and straightforward system of capturing your information.

What are the Scottish Property Taxes?

Registration Charges

We will have already given you an estimate of these charges with our quotation setting out the likely costs of your transaction. These charges are based upon the purchase price of the property and include an additional charge if there is a mortgage.

Ostensibly these charges based on the price are to cover the cost of registration of your title with the Land Register of Scotland in Edinburgh.
Land and Building Transactions Tax (LBTT)

this is the Scottish version of "stamp duty". It impacts all properties over £145,000 though there is a partial relief for first-time buyers which is covered later on in this explainer. The tax has to be paid at the point of purchase of the property and without payment of the tax it is impossible to register either your title to your new property or your lender's mortgage over the property. The tax is based upon a scale that penalises properties higher up the cost scale.
Additional Dwelling house Supplement (ADS):

This tax was originally introduced in 2015, following the introduction of a similar tax in the remainder of the United Kingdom, and is currently charged at 6% where applicable. While nominally a "second home" tax, this tax has been framed in such a way that many apparently benign situations involve the payment of the tax. It is incredibly important that you understand the implications of this tax so that you do not find yourself falling foul of the regulations which, as stated above, is a criminal offence and would be prosecuted by Scottish Government.

The approach of McVey and Murricane is to provide you with all the necessary information which reduces your choices to a simple traffic light channel of Red, Orange or Green. When you have read the material you can decide which traffic light channel you need to follow based on your circumstances. In real terms there are only two elements of the taxation system where your own personal circumstances may impact upon the applicability of tax or the amount which you pay. These are dealt with in the following steps which you should read very carefully.

How does ADS work?

In the following steps this explainer will detail those personal circumstances which dictate the channel you should select in our app (the link to which is provided in our accompanying email). With the information you need to decide whether you should follow the Green Channel, the Orange Channel or the Red Channel.

Depending upon the channel you choose, there will be cost implications but remember that it is incumbent upon you to be open, transparent and accurate because failure to do so may involve an enforcement officer knocking at your door carrying a summons!

Understanding the Channels

As explained above, ADS has been designed to close off loopholes. That approach makes it excessively complex. What follows is a visualisation which will allow you to understand whether you are liable for tax. Most straightforward transactions do not induce the tax.

The explainer includes four typical examples which show the navigation through the visualisation. These examples will help you to understand your own circumstances.

The complexity of ADS makes it helpful to understand a few straightforward concepts. This will help you understanding the examples and working through your own situation.

Family Unit means all of the people either currently in your household and the position after the CompDate (the day you buy the NewProp) irrespective of whether they are involved in the purchase of the property. Family Unit is broader than the name suggests. It covers everyone living within your current Main Dwelling and who will living in the NewProp If you are in any doubt whether someone forms part of your Family Unit choose the Orange Channel.

Two of the examples below highlight this. It does not matter whether you are married or in a civil partnership or whether you are living together. Even if anyone in your household owns a property directly or indirectly (say through a trust) that is deemed to be a property owned by your Family Unit

CompDate means 11.59PM on the day (Entry Date) that you purchase your new property

Main Dwelling means the property which is used by your household as their main place of residence

NewProp is the new property you are buying

Other property means any other residential property you own (see the definition of “own” below) wherever that property may be. So if you own a holiday home in Spain, for example, that counts as “other property”.

Own means, as you would expect, a right of ownership including a right of ownership of a part of the other property but, as you might not necessarily expect, may also mean a right under a lease of a residential property. This is a complex area and, if these circumstances apply to you (or you think that they might apply to you), you should select Orange.

There follows a group of examples giving some great examples of ADS. It is tempting to ignore these as "obviously not applying to you" but you really should read them because there are a few shocks there.

If a Family Unit are selling their Main Dwelling on or before the CompDate for the NewProp they are buying then generally ADS will not apply.

It is also fair to say that if everybody involved in the purchase of a NewProp is a genuine first time purchaser then ADS should not be due but as you can see from the examples, there are bear traps for the unwary. So please read them and then you can decide which channel you need to follow. If you are in any doubt select Orange.

Understanding the ADS decision board and working through examples

To make this a straightforward as possible, a "game" board is used.

The rows are described by the yellow labels; these take into account your current Family Unit position.

The columns are described by blue labels; these look at the transaction into which you are about to enter.

The combination of the rows and columns will guide you as to whether ADS is payable or not because your row and column choice determines the box you land on. The colour of that box will then dictate which channel - Red, Orange or Green you select in our App

Let’s start with our first example and it will explain the system in practice.

Robert and Jane are first time purchasers and are buying a flat at a price of £185,000.

That is their “NewProp”. Currently they live together in a rented flat. They are not married.

For the purposes of ADS, Robert and Jane are the Family Unit even though they are not married. Let's look at our board to see how Robert and Julie fare

Looking at the yellow row labels we want to see which label applies; Robert and Jane are first time purchasers and do not own any other property. So they end up on the fifth row because the Family Unit does not own any property.

Now let's look at the columns. Column 1 does not apply because the Newprop costs more than £40,000. Column 2 does not apply because the Newprop is not being bought by a company or non-person. But column 3 does describe the position accurately.

So where do the row and column meet? As you can see from the smiling Emoji and black arrow the square is green - so no ADS is payable. The Green Channel should be selected.

For the next example let’s change the story a little and it shows how unfair ADS can be.

Robert is a first-time purchaser and currently lives in a rented flat with his girlfriend Jane. They are buying a flat at a price of £185,000. That is their “NewProp”.

For the purposes of ADS, Robert and Jane are the Family Unit even though they are not married. However, Jane had a previous relationship with William a few years back. They had bought a flat together but when the couple split up, their lender would not agree to the property being transferred to William; so Jane is still on the title and mortgage. Jane has not paid anything towards either the mortgage or running costs of the flat she bought with William since they split.

The Family Unit (Robert and Jane) are, however, deemed to own another property because Jane still owns a share of the earlier flat she shared with William. it does not matter that only Jane has this ownership interest - the law states that if one of them has a property interest then they both are deemed to have that interest.

Looking at the yellow row labels we want to see which label applies; Robert and Jane own another property which is not their Main Dwelling. So they end up on the fourth row as shown below because the Family Unit has an existing property ownership which is not their main dwelling.

So the intersection of Row 4 and Column 3 in the picture below (the unhappy looking Emoji and black arrow) determines the channel which Robert and Jane should select. As you can see it is orange - ADS will apply unless they can take action to avert it. If they cannot take such action, the ADS charge will be (£185K x 6%) - a hefty £11,100. This is where Robert and Jane will need the expert advice that McVey & Murricane offer.

Later when we discuss First Time Purchaser relief on LBTT there is more bad news for Robert and Jane.

For the next example let’s look at Julie and Beccy who are in a Civil Partnership.

They currently live together and own a flat but are hoping for a family so they are buying a detached house at £280,000. This is their NewProp. Beccy also owns a buy to let flat. They have concluded missives (contract) so that both transactions will

complete on the same date. This is their CompDate.

The row questions with yellow labels as before are first to be considered. The first row applies because Julie and Beccy are selling their flat (their existing Main Dwelling) on or before the CompDate.

turning to the column blue labels, column 3 applies because the NewProp is being bought by Beccy and Julie as their Main Dwelling. So, as before we look at the intersection between row 1 and column 3. That is shown by the smiling Emoji below and the black arrow.

The intersection is green so there is no ADS payable. Select the Green Channel!

For the next example let’s take look at Julie and Beccy in a parallel universe who still live together in a flat but owned only by Beccy.

Beccy also owns a buy to let flat. Julie likes this idea and she wants to buy a buy to let flat herself at £150,000. Julie has read about ADS but she is confident that it does not apply to her because she is a “first time purchaser”

But Julie is in for a shock. Although, she and Beccy are not married, they do cohabit and they are deemed to be a Family Unit.

So Julie is deemed to own other property; the third line in the picture below applies because Julie and Beccy are not intending selling their existing flat (their existing Main Dwelling) within 36 months of the CompDate, to move into the property Julie is buying.

Column 3 does not apply as before because the NewProp is not being bought by Julie as a Main Dwelling. So, it is Column 4 that applies because the NewProp is being bought not as a Main Dwelling but as a Buy to Let.

When we look at the intersection between row 3 and column 4 (the disappointed Emoji and the black arrow) we see that it is red. ADS is payable and the Red Channel must be selected.

So although Julie is buying her first property, ADS applies at £9,000 and later we will find that Julie does not receive the First Time buyer discount on LBTT!

Making Your Selection

Using your own circumstances now decide from the ADS "board" whether you should choose the Green, Orange or Red Channels. Work through the yellow labels first as to which circumstance applies now and then the blue labels to determine the nature of the transaction. Then look at where the cross-section is on the board. Is it Green, Orange or Red?

Remember if you are in doubt select Orange - as you will see below there are costs relating to that. You are also always free to take an accountants advice or contact Revenue Scotland. If you take either of those options you must send us the note sent to the accountant or Revenue Scotland and their reply. Remember your choice - you will need this for the App for which you have received a link in the email which included this material. This is the contact web page of Revenue Scotland where you can read numerous more examples on ADS

Revenue Scotland

A Screenshot of the McVey & Murricane App

Costs

McVey and Murricane provide this Interactive Process free of charge.

If you select the Green Channel there is no cost.

If you select the Red Channel there is a cost of £35 + VAT to make the return to Revenue Scotland you will, of course, have to pay the ADS which is 6% of the purchase price of the property you are buying

If you select the Orange Channel the cost is based on the time expended. Your queries will be dealt with by John Clyde, our Head of Conveyancing, and a solicitor with over 40 years' experience.

John was also asked to be involved by the Scottish Government in the materials produced when ADS was launched. He had nothing to do with the introduction of the tax!

If it is a question easily answered then the cost may be a as little as £50 + VAT. If there is greater complication John will estimate the time it is likely to resolve matters and whether Scottish Revenue will require to be involved. The time will determine the cost but we will not make any charge that you have not already approved.

First Time Buyer LBTT Relief

In this section we look at who is entitled to the LBTT relief, how

much that relief is and how you interact with McVey and Murricane

Who is entitled to LBTT Relief?
The Scottish Government introduced limited relief for LBTT at the end of June 2018.

To comply with the relief
- all of the people buying the property must be a first-time buyer who intend to occupy the NewProp as their only Main Dwelling;
- the transaction can only be one where it is the acquisition of the
- major part of the NewProp (so, for instance, if you are obtaining Help to Buy, you can still ask for the relief);
- the Property consists entirely of residential property and includes a dwelling (essentially it is a house or flat);
- the transaction is not part of "linked" transactions (a contract, for
- example, where there was a agreement to buy 80% of the property now and 20% in a year); and
- ADS cannot apply (so if you look at the last ADS example, Julie who is a first time buyer does not qualify for the LBTT first time buyer relief in two ways; because ADS is payable on her purchase and she was not going to occupy the NewProp)
You can find out more here from Scottish Government
How much is the LBTT First Time Purchaser Relief?

The relief effectively raises the zero tax threshold for first-time buyers from £145,000 to £175,000. First-time buyers buying a property above £175,000 will also benefit from the relief on the that part of the price below the higher threshold.

So a qualifying first time purchaser would pay no LBTT on prices up to £175,000.

Above prices of £175,000 the qualifying first time purchase will receive a discount of £600 on the figure that would normally be charged.

Imagine the NewProp was £180,000 - LBTT would normally be £700 but is you qualify for the First Time Purchaser Relief it is only £100

The Scottish Revenue LBTT on Property Transactions calculator has been updated to assist first-time buyers in determining how much tax will be payable on their purchase after the relief has been claimed.
Interacting with McVey and Murricane

The same App as to deal with your ADS declaration also covers any claim for First Time Purchaser LBTT relief. As you can see from the screen shot the App is straightforward and will take moments to
complete