Purchasing Property in Scotland: Tax Issues to Consider

by Anne Marie Renz. Tax Director, Tax and Private Client.

It is important for an investor who is thinking of buying property in Scotland to understand the tax implications of acquiring, holding and disposing of the property. This article gives a high level overview of the main tax considerations that should be factored into the investor’s decision-making process.

Land and Buildings Transactions Tax

In Scotland, Land and Buildings Transactions Tax (LBTT) is payable on property purchases. This is similar to Stamp Duty Land Tax which is payable on the acquisition of property in England.

LBTT is payable on the purchase price and charged at different rates depending on whether the property is residential or non-residential. Purchases involving a combination of residential and non-residential property are treated as non-residential for this purpose.

Where the acquisition includes residential property, an additional amount of LBTT known as the Additional Dwellings Supplement (ADS) may also be charged. This effectively increases the LBTT liability by a further 3% of the amount of the purchase price that is attributable to the residential property. It applies where the purchaser or their spouse, civil partner, co-habitee or minor child already owns an interest in residential property anywhere in the world. However, ADS does not apply if the purchaser is acquiring 6 or more dwellings in a single transaction or if they are replacing their main residence.

Income Tax

The ongoing income tax consequences of owning property in Scotland largely depends on how the purchaser intends to use the property.

If the purchaser intends to occupy the property themselves as a second home or perhaps as a holiday home then the property will not be an income-producing so there will be no income tax to worry about.

If the purchaser intends to let the property to tenants, the purchaser may have to pay income tax on their rental profits at the basic rate of tax which is currently 20%. Depending on the owner’s circumstances, the personal allowance (£11,850 for the 2018/19 tax year) might be available. If it is, then income earned up to the personal allowance will not be taxable; only income in excess of the personal allowance will be subject to income tax. The personal allowance is only available to certain categories of individual so purchasers should not assume that it will automatically be available. For example, residents of the Channel Islands or Isle of Man will qualify for the personal allowance but residents of Hong Kong, China or the USA will not qualify for the personal allowance unless they are also a British or EEA citizen.

To assist with the collection of income tax, HMRC operate what is known as the “Non-Resident Landlords Scheme” whereby letting agents (or tenants if the property is let directly by the owner) are required to deduct 20% basic rate tax from the rental income and send this to HMRC on account of the landlord’s UK tax liability. However, the landlord can apply to HMRC to receive their rental income without this tax deduction provided they agree to comply with all UK tax obligations in future including submitting UK tax returns where necessary and paying UK tax.

Capital Gains Tax

When the owner disposes of residential property (for example, by sale or gift), they will be liable for Non-Residents Capital Gains Tax (NRCGT). This charges tax at the rate of 28% on any gain made on the disposal of the property, although only growth in value occurring after April 2015 is taxed. The gain must be reported to HMRC within 30 days of completion of the property disposal and any tax due must usually be paid at the same time.

If the property has been occupied as one of the owner’s residences at some time during their period of ownership, it may be possible to make a claim for principal private residence relief which could exempt all or part of the gain. The owner, together with their spouse, has to occupy the property for at least 90 days per tax year before the property could qualify as a principal private residence for that year.

At present, UK capital gains tax is not payable on the sale of non-residential property unless the property in question has been used for the purpose of a trade carried on in the UK. However, new rules will be introduced with effect from 1 April 2019 which will extend the UK capital gains tax charge to capture gains on the disposal of non-residential property. The new rules will also capture certain disposals of interests in UK property rich entities (for example, selling shares in a company deriving more than 75% of its asset value from UK property). Only gains accruing from 1 April 2019 will be brought into the charge; gains accruing prior to that date will not be charged to tax.

There are also important inheritance tax implications of owning property in Scotland or elsewhere in the UK. These will be discussed in a later article looking at the wider issue of inheritance and estate planning.

This article has highlighted the key issues to consider before investing in property in Scotland. This is intended only as an overview. The details of the taxes and the way in which they apply to non-residents are complex and it is an area which is the subject of constant change. Therefore, tax advice specific to the purchaser’s own situation should be sought before committing to particular course of action.