Jeff Salway: Revised property tax threatens market

LBBT rates could hammer the housing market Picture: Getty

Scotland’s new property tax still threatens to dampen housing market activity despite being watered down to bring it in line with new rates south of the Border.

Deputy First Minister John Swinney moved this week to cushion the impact of the land and buildings transaction tax (LBTT) on middle market homes by reducing the rate for purchases between £250,000 and £325,000.

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But the increase faced by those buying homes above that level will still deter buyers and risk blocking the housing ladder, experts warn.

Under the revised LBTT system there will be no tax on transactions below £145,000 – previously £135,000 – and a marginal tax of 2 per cent will be levied on those between £145,000 and £250,000.

That remains unchanged. However the planned 10 per cent rate on transactions between £250,000 and £1 million has been altered, with a new 5 per cent charge on the value between £250,000 and £325,000. The 10 per cent rate will still apply on the value between £325,000 and £750,000, while the 12 per cent marginal rate will begin at £750,000, rather than £1m as previously planned.

Holyrood was forced to act after its initial proposals, set out in October and taking effect in April, were undermined by stamp-duty changes introduced south of the Border last month. That meant the tax paid on properties at the middle and higher end of the market would be significantly lower elsewhere in the UK, raising fears of a detrimental competition impact on Scotland.

By taking another 5,000 households out of the property tax net the amendments deliver further savings for first-time buyers. But while the tax on properties in Scotland below £250,000 will be lower than elsewhere in the UK, the benefits to first-time buyers will be marginal, according to Dr John Boyle, head of research at Rettie & Co. “First-timers and those buying at lower end do benefit, but not markedly as they never paid much (if any) stamp duty anyway,” said Boyle, adding that access to mortgage finance remains the biggest obstacle for first-time buyers

The point at which buyers in Scotland will be paying more on property tax than those elsewhere in the UK will start at £330,000. And those higher up the market face tax charges far higher than they currently pay. For those buying properties at £500,000 it will rise 60 per cent from £15,000 now to £23,350 in April, despite a modest reduction following the alterations. People buying homes worth more than £400,000 are likely to scale back their ambitions after April, said Boyle, with some being forced to abandon their moving plans.

“If after April you are paying over £400,000, slightly above the Edinburgh average for a detached home, you will be facing an increased tax take of over one-third compared with the current stamp duty rates,” he said. “You can either stomach this, try to negotiate on price (difficult in a rising market), reduce the deposit (banks may not accept), or look for property at a lower price.”

The immediate effect will be to intensify activity in the middle to upper end of the market before LBTT takes effect in April. “If a lot of sales are brought forward to beat the new LBTT rates, this will have consequences as to whether the tax will be revenue neutral as the Scottish Government intends,” he said.

The revised rates are still proposals, with a further announcement from the Scottish Government before 1 April that will either confirm them or, less likely, set out further tweaks.

Andrew Perratt, Savills head of residential property in Scotland, predicted that the Scottish Government would need to make further changes to bring LBTT in line with stamp duty.

“The new system relies on 8 per cent of buyers for around 75 per cent of its tax take,” he said. “If there is any slow down at this level it will result in a substantial fall in revenue. It seems inevitable the threshold for the 5 per cent tax band will have to be extended in line with the rest of the UK.”

Spot the Dog report reveals funds trailing the rest of pack

Investors have £23 billion of assets lying in so-called “dog” funds that consistently fail to deliver, according to research published today.

The bi-annual “Spot the Dog” report from broker Tilney Bestinvest singles out 60 underperforming funds, up from 49 six months ago, with some of the UK’s best-known asset managers among the biggest culprits.

The research – which covers unit trusts and open-ended investment companies but not investment trusts – names and shames funds that have underperformed in each of the past three years and by more than 10 per cent over the three years as a whole.

Of the 60 funds in the “doghouse”, nine are run by Aberdeen Asset Management, largely due to last year’s acquisition of serial underperformer Swip. M&G is also prominent, reflecting the recent poor performance of the massive Recovery and Global Basics funds.

The Global sector accounts for one in six dog funds, whereas not one of the funds in the popular UK Equity Income sector appears in the latest report. Jason Hollands, managing director at Tilney Bestinvest, said: “Many investors put up with weak fund performance by either not monitoring their investments regularly, receiving poor service from the adviser who originally recommended the investment or through simple inertia.

“The differences in performance between funds within the same sectors can vary enormously, so it is vital to be very selective when making your choices.”