A combination of Scotland’s favourable tax reliefs for property investors and the ending of rent controls next month could lead to an immediate and substantial increase in investment in the private rented sector (PRS), according to Scottish lettings and estate agency DJ Alexander.

The tax reliefs available in Scotland offer buyers particular advantages which are not available in England or Northern Ireland. The two main methods which benefit the 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 does not apply to purchases of six properties or more.

Property investors and landlords can receive MDR on most transactions. The 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. 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).

Savings are even greater

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 as a single or linked purchase then, assuming each property was valued at £250,000, LBTT would be £63,500 but with MDR this would fall to £6,000 resulting in a saving of £57,500 as the 8% ADS costs would not apply (although would be £120,000 if these levies did 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.”

“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.”