Raising The Additional Dwelling Supplement Is Not Good For Landlords, Or Tenants!

The recent increase in the Additional Dwelling Supplement (ADS) from six percent to eight percent, announced in the Scottish Government’s 2025-26 Budget, has sent ripples through the property sector in Edinburgh. This sudden hike, effective from December 5, 2024, has significant implications for the private rented sector (PRS), particularly in terms of rental values and market dynamics.

What Is The Additional Dwelling Supplement?

The ADS is a tax levied on the purchase of additional residential properties, such as buy-to-let investments and second homes. The increase from six percent to eight percent means that buyers now face a higher upfront cost when acquiring these properties. For instance, a typical two-bedroom flat in Leith, a popular area for buy-to-let investors, saw its ADS bill jump from approximately £14,792 to £19,723 overnight. This additional financial burden is likely to deter potential investors, leading to a reduction in the supply of rental properties.

Reduced Investment

One of the immediate effects of the ADS increase is the potential withdrawal of buyers from ongoing transactions. Within hours of the announcement, there were multiple reports of concerned purchasers considering pulling out of deals due to the sudden financial strain. This uncertainty and disruption in the market could lead to a slowdown in property transactions, further exacerbating the already tight supply of rental properties in Edinburgh.

The reduction in the number of buy-to-let investors entering the market is expected to have a knock-on effect on rental values. With fewer properties available for rent, the competition among tenants for the limited supply is likely to intensify. This increased demand, coupled with a constrained supply, will inevitably drive up rental prices. Landlords, facing higher acquisition costs due to the increased ADS, may also seek to pass on these costs to tenants through higher rents.

Moreover, the ADS increase comes at a time when the PRS is already grappling with various challenges. The Scottish Government’s policies, such as the rent freeze and subsequent rent increase cap, have been seen as hindering supply and investment in the sector. The recent rent freeze, which capped rent increases at three percent, has led to new open market rents being set at higher levels to hedge against future restrictions. This, combined with the ADS hike, creates a challenging environment for both landlords and tenants.

Reduced Supply Of Rental Properties

The impact of the ADS increase is not limited to new investors. Existing landlords who were considering expanding their portfolios may now reconsider their plans. The higher transaction costs make it less attractive to acquire additional properties, leading to a stagnation in the growth of rental stock. This stagnation, in turn, perpetuates the cycle of limited supply and rising rents.

In the broader context, the ADS increase is part of the Scottish Government’s efforts to address the housing crisis by investing in more affordable homes. The 2025-26 Budget includes measures aimed at building 8,000 new properties for social rent, mid-market rent, and low-cost home ownership. While these initiatives are commendable, the immediate impact of the ADS increase on the PRS cannot be overlooked. The reduction in private rental stock could undermine the government’s efforts to provide affordable housing options, as the PRS plays a crucial role in meeting the housing needs of a diverse population.

Reduced Quality & Choice

The ADS increase also raises questions about the supply of good PRS housing stock in Edinburgh. With higher acquisition costs and regulatory challenges, landlords may find it increasingly difficult to achieve a reasonable return on their investments. This could lead to a decline in the quality of rental properties, as landlords may be less willing or able to invest in maintenance and improvements. Tenants, on the other hand, may face higher rents and reduced choice, making it harder for them to find suitable accommodation. It’s a lose-lose.

In conclusion, the recent increase in the Additional Dwelling Supplement is likely to have significant implications for the private rented sector in Edinburgh. The higher transaction costs will deter some new investors, likely reduce the supply of rental properties, and certainly create upward pressure on rental values. Existing landlords may also reconsider expanding their portfolios, leading to a stagnation in the growth of rental stock. While the Scottish Government’s efforts to address the housing crisis through affordable housing initiatives are commendable, the immediate impact of the ADS increase on the PRS cannot be overlooked. The sector faces a challenging environment, with higher costs, regulatory hurdles, all combining to fuel rising rents. The rental data evidence from all sources (e.g. Citylets) shows that the excessive governmental interference in the free open market PRS sector in the last five years has had the opposite effect of the stated aims of the Scottish Government.  The sector will adapt and develop, but would be more efficient and less difficult for all stakeholders if it were left to normal open market forces.