Scotland’s new property tax is in business

2 Apr 2015

Policy area: Taxation

LBTT has finally arrived, but how will it affect the property markets?

Deputy Finance Minister John Swinney spent the first morning (1 April) of his new tax, the Land and Buildings Transaction Tax, seeing how the tax works in practice, courtesy of our near neighbours, Brodies LLP. This wasn’t quite the first transaction under the new system I understand, but it symbolised that LBTT is a reality and that, hitherto, it appears to have had an effective start.    

Harder tests may lie ahead however, both for the administrative arm (Revenue Scotland) and for the Scottish Government. Residential agents have reported a significant increase in higher value house transactions in the first quarter of the year compared to the previous year – in fact double the number of transactions according to some.

This may be an issue for Mr Swinney for two reasons: first because it will inflate the SDLT coffers instead of the LBTT revenue. Second, because it may signal a slowdown in higher value transactions in Scotland post 1 April. If this latter point holds true then this will mean less choice and opportunity for those seeking to move up the housing ladder – and possibly upwards pressure on prices for those seeking to get onto the housing ladder, because there may be fewer properties in the market. 

The commercial rate of 4.5% has inevitably held less attention politically than the residential rates and thresholds. However, the introduction of a higher rate is at best unhelpful and at worst is a negative influence on attracting investment to Scotland. Members have already suggested we are seeing some movements in pricing to accommodate the changed tax charge. It would also be true to say that the LBTT system may yet be challenged by more complex commercial transactions or indeed the additional administration to be required under the lease duty legislation.

Mr Swinney has projected that LBTT will bring in some £449mn to the Scottish Government for 2015-16.  He has placed some large bets within this total on the performance of higher value residential properties. The question is how will he react if the higher value markets do not hold up?