Taxation and transfers of title
Transfer of Title - ADS and LBTT. Detailed but very important
Even though you are only involved with a transfer of title at this stage, unfortunately the transaction is seen in the same light by the Scottish Government as a normal purchase which leads to the possibility of two taxes arising. These taxes are LBTT (which is the Scottish equivalent of stamp duty) and ADS which is an additional “second house” tax that has been drafted in an extraordinarily complex and wide-ranging manner so that many circumstances, which do not immediately seem to involve a “second house” may nevertheless invoke the tax.
What is “chargeable consideration”?
Where a title is being transferred outside of a normal purchase and sale situation it is often the case that there is no formal purchase price being paid by the person to whom the transfer of all or part of the property is being made. However, the Scottish Government regards many circumstances as representing an effective payment. This effective payment coupled with any monies that are actually being paid is grouped together as the “chargeable consideration” which is required to calculate both the LBTT and ADS.
A shorthand calculation to ascertain the chargeable calculation is as follows.
In this calculation the “Existing Owner” is the person who is currently on the title and who is transferring all or part of their interest. The “Transferee” is the person to whom that interest is being transferred.
Calculation 1 is to multiply the mortgage (if any) existing over the property before the transfer by the share of the property being transferred by the Existing Owner to the Transferee. (So if Mr Bloggs is transferring 50% of the property he owns to Miss Smith and there was a mortgage of £90,000 on the property before the transfer then this part of the calculation would equal £45,000)
Calculation 2 is to add to Calculation 1 any money being paid by that Transferee to the Existing Owner. (So, in our example above if Miss Smith was also paying £5000 to Mr Bloggs in receiving 50% of the property then this part of the calculation would be the addition of £5000+£45,000 from the previous calculation. This would mean that the “chargeable consideration” was £50,000.)
What is LBTT?
LBTT is the Scottish version of Stamp duty which is applied on a chargeable consideration in terms of the following table;
|Purchase price||LBTT rate|
|Up to £145,000||0%|
|Above £145,000 to £250,000||2%|
|Above £250,000 to £325,000||5%|
|Above £325,000 to £750,000||10%|
What is ADS?
Additional Dwelling Supplement (ADS) is a supplementary tax which, since its introduction on 1st April 2016, is payable on the acquisition for a chargeable consideration (on the whole chargeable consideration but not on transactions where the chargeable consideration is less than £40,000), of any additional residential dwelling that is not the purchaser’s main residence. The current supplement payable is 3% of the chargeable consideration in addition to any LBTT that may be payable on the price. More information on ADS and its application can be found on our website at;
Why is this relevant to you?
The potential relevance of ADS to this transaction lies in the ambiguity of the wording of the legislation which is, as we are discovering, leading to a series of unintended consequences.
Are either or both of LBTT and ADS payable?
As part of our regulatory requirements by the Law Society of Scotland, we submit the LBTT (which includes ADS calculations) return to Revenue Scotland on your behalf and we are under a legal obligation to ensure that the return is accurate and discloses where tax is due. That means that we have to examine the circumstances of the transaction and assess whether tax is due. The questionable drafting of the Act mentioned above (and the general difficulties of the Act referred to in our article) make that assessment an extremely difficult task. We are not tax advisors and cannot provide you with definitive advice on whether the tax is payable or by how much; to assist you we provide you with our best understanding of the position but you are free to take tax advice if you wish. It is important that if you have any doubts or queries regarding payment of ADS that you contact a tax expert or an accountant for further information.
LBTT/ADS and your transaction
We will have sent to you an interactive App in respect of your transfer of title part of which will deal with the calculation of any tax that is due.
If the transfer is being carried out to implement the terms of a Separation Agreement between persons who are married or in a civil partnership then there is no LBTT or ADS. If this applies to you, you must let us know immediately.
What does this mean? You must pay any tax that is due by you but it is perfectly in order to to look at any transaction and to consider the pros and cons of any such arrangement. As you will see from the table below if the circumstances of your transaction mean that ADS and/or LBTT are payable the sums involved can be significant. In the light of that knowledge you may decide that a default 50/50 transfer is not your preferred option. In the table that we provide below, where we have assumed that ADS applies, there is a significant difference in cost between transferring 1% of the property or 50% of the property.
|MMI Worked Example: Market Value/Mortgage Amount= £150,000|
|Percentage of Ownership||ADS Liability||LBTT Liability|
In the circumstances where a lender requires a property to be transferred into joint names to support the loan, and the circumstances of the parties means that ADS applies, then clearly it would be far cheaper to transfer only 1% of the property to the person coming on the title.
As with most things in life, there is a downside to such a choice, and our aim is to ensure that you have the information necessary for you to make an informed choice. So what are those downsides?
“Feel right”/Moral issues
Where two people are doing something together, whatever the nature of their relationship status, either or both of the people may feel uncomfortable that both parties are contributing to the mortgage but that the title is not held 50/50. In addition, if a person only receives 1% of the title it means that their entitlement, should the relationship come to an end, is only to that 1% of the value of the property. On the other hand, because that person is only benefiting by coming onto the title because they are contributing to the mortgage, both parties may feel this is a reasonable and that the mortgage payment is less or similar to rent that would have been paid.
- Considering the end of a relationship or death Transferring only a small percentage of the property may seem attractive at this point in time but it might seem unattractive several years down the line or in the event of death of one of the parties.
Here’s an example: Mr Bloggs and Miss Smith live together and currently the title is the name of Mr Bloggs. Mr Bloggs applies to a lender for a new mortgage but the lender indicates that they will only agree to the new mortgage if Miss Smith is also party to the mortgage. Because lenders require the parties on the mortgage and the parties on the title to be the same it means that the title requires to be transferred into the names of Mr Bloggs and Miss Smith. Because Miss Smith already has an interest in the property arising from the former relationship, Mr Bloggs and Miss Smith are faced with a situation similar to the table above where ADS applies to the transfer from Mr Bloggs to Miss Smith. Looking at the different costs Mr Bloggs and Miss Smith decide that Mr Bloggs will only transfer 1% of the property to Miss Smith.
So, let us imagine that the property was worth £100,000 and the mortgage is £90,000. The property is transferred to Mr Bloggs and Miss Smith and that represents an effective gift by Mr Bloggs to Miss Smith of 1% of the current equity of the property which is £100 (£10,000 multiplied by 1%). Not a great deal.
So these decisions should not be made just with a short-term view but take into account both the likely increase in the value of the property and the potential course of the relationship in the future. These are difficult things to assess but failure to deal with matters properly now can create problems in the future.
What is absolutely important is that any tax that is due is paid. Any mechanism employed by the parties to avoid paying tax that is properly due is a criminal offence. So the parties cannot say that the proportion of the property being conveyed is 1% but agree between them to treat it as if it was 50% when the property came to be sold. So it is essential that the parties are transparent because the Scottish Revenue who collect these taxes are active in enquiring in particular cases.