I have two reactions to the news that Derek Mackay, the Holyrood Finance Secretary, will consider changes to Land and Buildings Transactions Tax (LBTT) after it was admitted that revenue from it during the current parliament is expected to be £800 million less than forecast.
One: will Mr Mackay privately admit that the sums were wrong and that LBTT as it currently stands requires serious amendment?
I believe there are four areas of change to LBTT that could boost Holyrood’s coffers
Two: will the Scottish Government be prepared to drive change, both to help rejuvenate the housing market but also to increase the tax take from transactions for spending on health, education and other essential public services?
I don’t know if Mr Mackay’s “considerations” will extend to seeking consultation with professionals working at the property coal face – after all, we consistently warned the government of the implications of LBTT rates but these warnings have so far been dismissed.
For my part, I believe there are four areas of change to LBTT that could help increase residential property sales – and boost Holyrood’s coffers:
1: Raise the threshold of LBTT on all transactions above £350,000, which is when LBTT becomes more expensive than stamp duty. At present tax on a purchase of £350,000 is £8,350 compared to the £7,500 it had previously been – and the higher the price the more ‘progressive’ (ie more expensive pro rata) the tax bill. At present in some locations (Edinburgh in particular) house-hunters will be aware of how limited £350,000 is in terms of house-buying power; LBTT is cutting into the bowels of the property market, not merely tinkering with its more expensive edges.
2: The rate of LBTT should peak at transactions of £1m, which is already just under 8 per cent of the sale price – not an inconsiderable amount. There will be the usual claims that this is a concession to “the rich” but in practical terms such a move would make sense. For example, LBTT on a £1m sale is currently £78,350 (compared with £43,750 in England and Wales); a price of £1.25m adds an additional £20,000 to the tax bill. Evidence clearly shows that people wanting to buy traditional properties at the top end have worked out that taxation leaves nothing left for refurbishing. So they back off – meaning lost income for the Government. More importantly, a sales hiatus at the top end leads to a partial logjam in the middle market, the negative effects of which are eventually felt even further down the line. Reducing tax on the highest-value properties will help generate overall sales.
3: Give special tax concessions to elderly “downsizers”. A typical couple whose children have flown the nest and wish to vacate their late-Victorian pile in Murrayfield or The Grange for a spacious, but more manageable flat costing, say, £650,000, will pay £38,350 in tax – a big ask for someone worried their pension pot might not see out their retirement. Such a move would generate more transactions involving larger family homes, also leading to a net increase for the Government in overall tax take.
4: The Scottish Government needs to create a greater sense of equilibrium between property taxes north and south of the Border. No one wants to see unbridled foreign investment overheating the market here as it has done in London; yet at the same time it is not in Scotland’s interests to be given the cold shoulder, but that is a risk given the current tax differentials on like-for-like properties.
In formulating LBTT, the Government clearly felt there was fairness in reducing the tax burden on first- and second-time buyers on the lower rungs of the property ladder and that, in practical terms, this would be more than covered by taxes from transactions higher up.
But it hasn’t worked out that way. And talking of fairness, is it really right that a family moving to a new, detached, £450,000 villa in Falkirk, should pay £5,850 more in tax than one in Felixstowe?
• David Alexander is managing director of DJ Alexander