Scotland’s favourable tax reliefs make it a more attractive proposition for property investors and landlords, according to DJ Alexander Ltd.
The lettings and estate agency points out that Scotland and Wales are now the only two countries of the United Kingdom which have favourable tax relief on the purchase of two or more properties.
Last year these tax reliefs were removed in England and Northern Ireland but still apply in Scotland where it can reduce taxes paid on land and buildings transaction tax (LBTT) by tens, or even hundreds, of thousands of pounds.
The two main methods of tax relief which benefit the Private Rented Sector (PRS) are multiple dwellings relief (MDR) which is available for purchases of two properties or more in a single or linked transaction and the Additional Dwelling Supplement (ADS) which is usually charged at 8% but, combined with MDR, does not apply to purchases of six properties or more.
Property investors and landlords can receive MDR on most transactions and this relief works by ensuring that the buyer does not pay Land and Buildings Transaction Tax (LBTT) at a higher rate than if the properties were bought separately and lower rate bands would have applied. This means that MDR works as a partial relief from LBTT. The relief ensures that in all cases a minimum prescribed amount of tax is charged on transactions involving multiple dwellings.
MDR is available on most transactions that include multiple residential dwellings whether or not there is also non-residential property in one or more of the transactions. Both multiple dwellings relief and the Additional Dwelling Supplement (ADS) relate to transactions with dwellings and additional property that is not classed as a dwelling (i.e. investment properties for the private rental sector).
Where the ADS is applicable, MDR may be available. MDR may also be available on the purchase of six or more residential properties bought in a single transaction and these are not subject to the ADS and are treated as being non-residential.
As an example, someone buying a single property costing a total of £500,000 would pay £23,350 LBTT and £40,000 in additional dwelling supplement (ADS) totalling £63,350. Buying two properties costing a total of £500,000 and assuming each property was worth £250,000 with MDR applied then the costs would be £4,200 in LBTT and £40,000 in ADS totalling £44,200 which is a saving of £19,150.
If six properties are involved in a single transaction or linked transaction, then the savings are even greater as ADS does not apply. If an investor bought a single property costing £1.5m then the LBTT liability on the purchase would be £138,350 and an additional £120,000 for ADS totalling £258,350.
However, if a landlord or investor buys six properties at a cost of £1,500,000 as a single or linked purchase then, assuming each property was valued at £250,000, LBTT with MDR applied would fall to £12,600 resulting in a saving of £245,750 as the 8% ADS costs would not apply.
David Alexander, chief executive officer of DJ Alexander Scotland, said: “With the combination of MDR and purchases of six or more properties eliminating ADS this offers a greater opportunity for landlords and investors to buy into the PRS in Scotland.
“Rent controls ended last year and cannot be implemented until 2028 at the earliest and only after an assessment of fair value by local councils. Therefore, this may be the ideal chance for many who have held back from investing in the sector to jump into a market which is experiencing unprecedented demand.
“These tax reliefs could provide an ideal opportunity and financial incentive for the PRS to grow rapidly in Scotland to service the needs of thousands of tenants currently unable to find suitable properties.”
Mr Alexander concluded: “These reliefs provide a welcome support for the private rented sector and for landlords and property investors. There is an urgent and immediate need to provide thousands more homes in the PRS and these reliefs provide an immediate boost and financial support to encourage property purchases quickly and efficiently.
“It is to be hoped that these more favourable circumstances will ensure that investors see Scotland as a potentially profitable and viable investment opportunity, and that it encourages them to enter the market at scale in the coming year.
“This provides landlords and investors the chance to come into a market with enormous demand at all levels enabling them to buy anything from two homes to multiple properties which would help to meet demand in a relatively short time.”