How to get your house in order to avoid tax pitfalls

Susie Mountain

I suspect that when Robert Burns penned the romantic line “come live with me and be my love” the biggest risk he faced was a broken heart.

However, fast forward to 2017 and something far worse could be at stake; an unexpected tax bill.

Moving your other half into your home could prove extremely costly if thought is not first given to the potential legal and tax implications. Many people will by now be aware that stamp duty land tax has been replaced land and buildings transaction tax (LBTT), a tax charge arising from deals such as the purchase of a new home.

However, its sister tax, the additional dwelling supplement (ADS) and, more importantly, the potential pitfalls arising from it are perhaps less well known.

ADS is an additional tax on the acquisition of a residential property or properties over and above a person’s “main residence”.

It applies where a sum of £40,000 or more is paid. A rate of 3% is applied to the entire sum paid to calculate the additional tax due.

There are some instances in which ADS is not charged and these include transfers of property on divorce or the dissolution of a civil partnership. The situation I wish to focus on here is that of “replacing a main residence”.

In a nutshell, ADS is not charged when a person disposes of their main home and acquires a replacement, however, there are pitfalls.

Take this scenario: Archibald and Betty are dating. Archibald owns a flat – Archie’s Pad – and Betty owns a house (Betty’s Villa).

They spend a lot of time together, including the odd overnight stay at each other’s homes, but Archibald’s “main residence” is Archie’s Pad and Betty’s is Betty’s Villa.

Archibald sells Archie’s Pad and buys a new property, Couples Cottage. Betty and Archibald move in it, but Betty continues to own Betty’s Villa. As Betty is not disposing of her main residence, there will be an ADS charge on the purchase of Couples Cottage, even although Betty’s name is not on the title deed.

But if Betty and Archibald had lived together at Archie’s Pad prior to the purchase of Couples Cottage and the property was purchased under both names, no ADS would be charged.

Two similar versions of a living situation, with significantly different tax implications – this is just one of the many issues which may arise when inviting a person to share your home.

Should you find yourself in this position, consider consulting a solicitor for advice.

Susie Mountain, senior solicitor with Brodies’s family law team in Aberdeen.