Will Stamp Duty changes force property investors north of the border?

01 December 2015

Shirley McIntosh 

Last week’s Autumn Statement brought a further shock for buy-to-let landlords with the introduction of a 3 per cent additional Stamp Duty Land Tax (SDLT) charge on residential purchases.

Although SDLT only applies in England and Wales, Scotland’s spending review is due on 16 December and it remains to be seen whether John Swinney follows George Osborne’s lead by adding a surcharge to Land and Buildings Transactions Tax (LBTT). This was certainly what happened 12 months ago when Mr Swinney revised the initial structure of LBTT following Mr Osborne’s revamp of SDLT.

If Mr Swinney holds firm with the current structure of LBTT, this will create a potentially significant disparity between the rental markets in Scotland and England/Wales and it has been suggested that this might encourage investment in the Scottish residential rental market from interested parties south of the border. For example on the purchase of a £350,000 let property in Scotland LBTT would currently be £8,350 while in England SDLT is £7,500 rising to £18,000 from next April.

But it’s not just LBTT that needs to be considered when looking at the potential returns that can be made on cross border property investments. The Scottish Rate of Income Tax (SRIT) will be introduced from 6 April 2016 and will replace 10p in the pound of all rate bands. HMRC has this week confirmed that they are writing about the changes to the 2.6m people that they believe will be Scottish Taxpayers.

SRIT will apply only to non-savings income and while conceptually rental income feels as if it should be included with savings income, it will in fact be subject to the SRIT. Should the tax rates diverge north and south of the border we will then be faced with the interesting scenario of English based landlords paying income tax on rental profits from Scottish properties at rest of UK rates, while Scottish based investors with property south of the border paying tax on that profit at Scottish rates. Two identical properties in Edinburgh, purchased for rental purposes, could generate different investment returns simply by virtue of one owner being a Scottish taxpayer and the other being resident in England.

Most commentators believe that the SRIT will be 10p for 2016/17 meaning no difference in tax rates north and south of the border next year. But with the Scotland Bill expected to be enacted in time for changes from 6 April 2017 and uncertainty over future tax rates north of the border, the benefits of investment in Scottish residential property might not be as obvious as they seem.