Bill Jamieson: tax hike could backfire on Swinney

Funds for the Help to Buy scheme for Scottish home buyers have been slashed.''Picture: Phil Wilkinson
Funds for the Help to Buy scheme for Scottish home buyers have been slashed.''Picture: Phil Wilkinson
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HOUSING is a critical area for Scotland’s economy.

It supports tens of thousands of jobs directly and as many more in the building supply chain and services. But today housing policy is beginning to look like a dog’s dinner.

Already the number of building starts in Scotland remains lamentably below the pre-financial crisis level. And in sharp contrast to policy down south, funds for the Help to Buy scheme for Scottish home buyers have been slashed.

Into the lap of Scotland’s Finance Minister, John Swinney, has fallen what looks to be a gift from a clear blue sky – and from the most unlikely source – George Osborne, Chancellor of the Exchequer.

Among the Autumn Statement measures last week were proposals to hit buy-to-let investors and second home owners down south with an extra 3 percentage point increase in Stamp Duty – the tax levied when you buy a property or land over a certain price.

Here we have the Land & Buildings Transaction Tax, Scotland’s first new devolved tax which came into effect back in April.

Swinney is due to unveil Scotland’s budget barely three weeks away on 16 December. How tempting it must be for him to follow Osborne’s example.

Buy-to-let investors and second home owners are seen as the low hanging fruit of the property tax system. They have little political support. The Conservatives can hardly protest: this new tax is of their own Chancellor’s making. And the 3 percentage points charge for buy-to-let and second homes effective from next April is set to bring Osborne hundreds of millions of pounds in extra revenue.

It means the tax bill on a buy-to-let property or second home down south costing £250,000 will jump by £7,500. For those buying a second home costing £350,000 the Stamp Duty charge will rise by £10,500.

The Treasury estimates the move will net the exchequer £625m next year and £880m by 2020.How Swinney must be salivating at the prospect. And what a prospective glittering addition to Scotland’s bristling armoury of new tax-gathering munitions this would make!

But before rushing to congratulate Swinney on his blessing we must be tolerably sure he has really received one – and to check that such an impost would not inflict serious damage across the housing sector and the wider economy.

Scotland’s flagship new Land & Buildings Transactions Tax has not got off to the best of starts. Evidence presented to Holyrood’s finance committee last week showed that it faces an 18 per cent shortfall in revenue on residential properties compared to what it was projected to make by Swinney. In cash terms that means a shortfall of some £40m. 

Separately, David Eiser, writing for the Centre on Constitutional Change, points out that buried deep in the OBR forecasts last week was “some slightly bad news for Swinney. The OBR has reduced its forecast of revenue from L&BTT. For 2015/16, its forecast has been reduced from £540m to £397m”.

Now these are guesstimates at this stage covering a seasonal market with local variations. But it suggests a significant shortfall from original expectations, one that may not see an imminent recovery as home owners switch to home improvement and refurbishment rather than trading up to another property. To make good the loss of one ‘high end’ transaction requires more than 15 transactions at the lower band end to remedy the revenue loss.

Swinney’s research would also need to cover both the effect on rents and the wider knock-on effects in areas of high second home penetration. Here it could cast a real blight on activity and employment.

Will Banham, one of Scotland’s leading land and rural estate agents, cautioned that it could wreak havoc on the traditionally robust sector that “is a crucial part of the property market across much of rural Scotland.  This is particularly true throughout the rural west coast and the islands where the holiday home market represents a good proportion of total transactions and is an important part of the rural economy”. With the market static at present, “any increased tax burden on second home buyers… could have a chilling effect across the entire rural property market”.

It would also deprive many smaller independent builders of refurbishment and improvement work – as if the outlook was not challenging enough already. The SNP administration is planning to halve the Help to Buy budget from £130m to £65m. Back in 2007, we were building 25,741 new homes. Last year, as Scottish Tory leader Ruth Davidson pointedly reminded First Minister Nicola Sturgeon last week, that figure fell to just 15,562.

One suspects that the working assumption within St Andrews House ahead of last week’s Spending Review was that a cash-strapped George Osborne would announce cuts in the Help to Buy scheme down south. But that was not at all how it panned out.

Homes for Scotland chief executive Philip Hogg points out that what is particularly galling for home buyers and the house building industry in Scotland is that in marked contrast Osborne is proclaiming the biggest homebuilding programme since the 1970s – and announced more support through the Help to Buy scheme for house buyers in England.

Of course, Swinney needs to ensure that help for housing is given in the most tax-effective and efficient manner. That requires an appreciation of the interplay between private housing output and social housing – for example, ensuring that policy helps second and third steppers on the housing ladder to move on up to release their starter homes for the new generation of young buyers.

Then there are financial costs to consider. The average Help to Buy purchaser costs the administration £37,000 – but that is £21,000 less than the average grant for “social” housing. Help to Buy support is repaid in due course. So there is much that the private sector can contribute to the provision of starter homes at a cost that is manageable for the buyer and more efficient for the administration.

So my earnest plea is that Swinney will pause before rushing to gulp freely from the chalice Osborne has unwittingly passed to him. A careful review of its costs and consequences is in order. «