Last week SNP’s John Swinney, the Scottish Finance Secretary announced his first draft budget for 2015-16 with the first direct revisions to Scottish taxes for over 300 years.
One of his most significant proposals is to replace Stamp Duty Land Tax ( SDLT ) with a new Land and Building Transaction Tax ( LBTT) which will come into force in April 2015. This will affect all residential and non residential purchases in Scotland, although this Article will focus on the changes to and likely effect on the residential market only.
Under the new tax proposals, a marginal rate of tax of 2% would apply to the proportion of a transaction between £135,000 and £250,000, while a 10% rate will apply to those between £250,000 and £1,000,000. Mr Swinney’s Party’ stated intention is to put the “ability to pay at the heart of what it has done” and certainly his changes will mean that more first time buyers will escape the requirement of any Government levy. A prime example would be a purchase at around £150,000 – under the existing legislation, SDLT of £1,500 would be paid. Under the new LBTT rates, there would be just £300 to pay, a significant saving of £1,200. In Edinburgh and immediate surroundings, the average sale price is in the region of £220,000 – under the existing legislation SDLT of £2,200 would be paid, and under the new proposals, only £1,400 – a saving of £800.
The point at which the new tax calculations will start costing the public more will be on any transaction over £325,000. An example of this is a purchase at £500,000, which under the existing legislation would see SDLT of £15,000 paid but under the new rules LBTT of no less than £27,300.
The figures at £1,000,000 are even more significant – £77,300 of tax under the new rules, compared with £40,000 under existing rules.
It is at the forefront of the Finance Secretary’s case that over 90% of the Scottish market, as a result of these changes, will pay less land transaction tax than under the existing regulations. That would indeed appear to be the case when looking at current statistics However it has been pointed out by many critics of these changes that there is likely to be some short to medium term distortion and disruption to the middle and upper levels of the market, particularly in high value areas such as Edinburgh, Aberdeen, and selective parts of Glasgow. The hardest hit are likely to be those in the £350,000 to £500,000 band. These are not, the critics contend , the “super rich”, but in the more affluent parts of the country, are the middle classes purchasing standard family homes. These are the aspirational people who are the creators of wealth and major contributors to the economy ( not only through taxation ) in almost all sectors and it is argued that they are the very people that Scotland ought to be encouraging and incentivizing to choose to live and remain in Scotland . The general consensus is that it will certainly take some time for the market to settle after these new tax levels are introduced and for the moment there is much conjecture as to whether the sums involved will be a real disincentive for some to see Scotland as the location of choice when compared with other areas of the UK. This is also a very clear reminder that the Scottish Government has the power to set tax rates and may not be afraid to use them in other areas. Only time will tell.
In the short term, the top end of the market is likely to see a significant rise in activity, with pressure to conclude deals within the next six months, before the new tax levels come into force. After April 2015, market activity is thought to be likely to swing back towards the lower end of the market, while those who are likely to be most disadvantaged by these new changes rein in any plans to move. What no-one can predict is the numbers of transactions these changes will affect, and whether the knock-on effect of a slow down in the local middle market will eventually cause a log jam amongst those either at the more affluent end of the first time buyers market, or seeking to move on from that point.
Finally, it should be stressed that this is a draft budget, and these proposed figures and bandings have not yet been confirmed. However it is thought very unlikely even after reviewing public reaction to these figures, that there will be any significant change to the overall proposals. Over time it will doubtless become just another cost for home owners to have to factor into an already expensive process.
Author: Anne Pacey, Shoosmiths LLP