Tax reliefs in Scotland could drive rental sector growth

Confirmation that rent caps will end next month is expected to prompt an increase in the levels of investment in the private rented sector (PRS) in Scotland. Many within the sector believe that uncertainty over the rent cap held back billions of pounds of investment particularly in the build-to-rent market.

However, for those wishing to invest on a smaller scale in Scotland there are reliefs – multiple dwelling relief (MDR) and no Additional Dwelling Supplement (ADS) on larger purchases – which provide particular advantages not available in England or Northern Ireland. In June last year MDR was ended elsewhere but remains in place in Scotland.

This means that property investors and landlords here can receive MDR on most transactions that involve the purchase of two or more dwellings in a single transaction or in a series of linked transactions. 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. 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 ADS relate to transactions with dwellings and additional property that is not classed as a personal 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 even though these are not subject to the ADS and are treated as being non-residential.

As an example, someone buying two properties costing a total of £500,000 would pay £13,500 LBTT and £40,000 in additional dwelling supplement (ADS) totalling £53,500. Assuming each property was worth £250,000 with MDR applied then the costs would be £2,000 in LBTT and £40,000 in ADS totalling £42,000, which is a saving of £11,500.

If six properties are involved in a single transaction or linked transaction, then the savings are even greater as ADS does not apply. Therefore, if a landlord or investor buys six properties at a cost of £1,500,000 – with an assumed value of £250,000 each – as a single or linked purchase then LBTT would be £63,500 but with MDR this would fall to £6,000 resulting in a saving of £57,500 as the 8 per cent ADS costs would not apply (it would be £120,000 if these levies did apply).

The combination of MDR and purchases of six or more properties removing ADS provides an opportunity for landlords and investors to buy into the PRS in Scotland. With the ending of rent controls 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, therefore, provide an ideal opportunity for the PRS to grow rapidly in Scotland to service the needs of thousands of tenants currently unable to find suitable properties.