LBTT - the law of unintended consequences in action

27 June 2017

The introduction in April 2015 of Land and Buildings Transactions Tax (LBTT) was seen as an opportunity to create a tax that would be far more attuned to the Scottish property market. The replacement of Stamp Duty Land Tax (SDLT) in Scotland gave the Scottish Government a fresh start to consider the challenges of raising tax while stimulating the housing market where it was felt necessary.

The change to a progressive system when the first rates were announced was quickly replicated in SDLT, but there has long been criticism of the rates at which the tax applies for housing, particularly around the middle market where, for properties being purchased for a value of between £325,000 and £750,000, the top slice of tax is charged at 10 per cent. This compares with a rate of 5 per cent for properties in the rest of the UK.

Reductions in the number of properties being sold - particularly in that range - has been blamed for a shortfall in revenue receipts from the tax. In the first year of LBTT, the shortfall in tax raised was around £33m and the figure raised to date is currently around £82m behind Scottish Government forecasts.

Comparison with SDLT receipts for all properties makes for interesting reading. In 2014/15, the last year of the tax applying UK wide, the amount raised in Scotland at £488m represented 4.5 per cent of the total. In 2015/16, the £416m raised from LBTT represented only 3.7 per cent of the total raised from SDLT and LBTT across the UK.

Also, the introduction of the Additional Dwelling Supplement from April 2016 applying an additional 3 per cent tax to purchases of second and buy-to-let homes was intended to improve the first-time buyer market by discouraging investors seeking returns on their savings. However, the cost of moving up the housing ladder has seen supply at the lower end of the market reduce. Purchase prices have increased, particularly in Edinburgh, and the impact on the letting market has simply been to increase rents.

The suggestion therefore that the Scottish Government is considering an adjustment to the middle rate band has been welcomed. Restructuring of SDLT does not seem to have had the same impact on the volume of transactions elsewhere in the UK and perhaps there is a lesson to be learned here about taxpayer behaviour.

For more information please contact Shirley McIntosh, or your usual RSM contact.