What impact will the new Land and Building Tax Taxin Scotland have on the market?

From April 2015, Stamp Duty for Scottish residential and non-residential property sales will be replaced by a new tax which will be collected within Scotland. It will be known as the Land and Building Transaction Tax and referred to as LBTT throughout this briefing note. Here Savills give their view on the plans.

Progressive taxation

The Scottish Government is proposing a more progressive tax system from April 2015 which would favour residential sales at £180,000 or less. However, sales above £200,000 will incur a higher rate of tax than at present. The majority of housing suitable for growing families in thea main cities of Scotland is priced at more than £200,000.

Impact on family housing

The cities of Glasgow, Edinburgh and Aberdeen are important forces in the Scottish residential property market. Suitable family housing is only available at a premium and is often priced well above £180,000. Within Edinburgh and Aberdeen in particular, sales between £200,000 and £500,000 accounted for 33% of all transactions.

LBTT will see the tax due on properties in this range increasing by an average 46% which compares to an overall 34% average increase in various price bands from £180,000 to £1.5 million, as listed in Table 3. Therefore, the proposed LBTT is going to add to the cost of moving for those living in Scotland's key cities. It will be challenging for families whose demands mean the property they need is only available at a further premium.

Competivity

A further source of concern is the reduction in competitiveness in Scotland compared to the rest of the UK. LBTT may make investors view Scotland as a more expensive choice and with reduced potential returns due to the higher levels of tax on family housing. Looking to the future, Scotland needs to be doing the most it can to be an attractive place in which to invest, live and work and property taxation is a key component in this mix.

Punitive prime taxes

The amount of tax due as a percentage of the cost of a property above £1.5 million will increase from 7% to almost 9%. This could make Scotland’s ultra prime properties less attractive compared to similar stock elsewhere in the UK, where less Stamp Duty will be paid. 

Out with the old?

The current Stamp Duty system, despite its flaws, creates clear price point thresholds. These are easily understood by buyers and sellers and this has encouraged properties to be sold around significant price points, often minimising the amount of tax paid. The new system is more complex, less transparent and is likely to cause confusion for both sellers and buyers.

New thresholds are likely to be created under the proposed structure, especially by those who need to help their clients understand the new system. For example, a new threshold of marginally more than £200,000 could be created because that would equal the same amount of tax as a £250,000 transaction under the current system. The LBTT tax is likely to create uncertainty and inconsistency for both buyers and sellers.

Less liquidity

For some buyers, LBTT has the potential to reduce the amount they are able to borrow, with more of their saving going towards tax. As a consequence, their ability to move will be even more dictated by finances and their scope to save.

Families in particular struggle to save large sums, with childcare and living costs consuming much of their income. Sellers, already concerned about potential negative equity, may be forced to further reduce prices in order to match what buyers can afford, creating a static market which would benefit no-one.

Should this progressive form of Stamp Duty be applied, it will introduce positive results for 72% of buyers in the Scottish residential market, provided the market remains exactly the same. However, more than a quarter of Scotland’s house buyers will be hit with higher taxes.

Reducing the ability of potential house buyers to move can create a static market, just as the restrictions on mortgage lending have done. This presents problems for buyers and sellers alike and can lead to reduced market activity.

While the principles of a progressive tax allow a more realistic price curve and helpfully provide a tax free allowance to help those at the lower ends of the market, the system needs to be fair for everyone. Our analysis indicates that the proposed rates have not been sufficiently researched and do not take into consideration the composition of the Scottish housing market.