Cut property taxes or face the real risk of a shortfall in revenue - David Alexander

I warned last year that the assumption that homebuyers in Scotland would be happy to continue to pay substantially higher rates of tax was a risky strategy because they may, at some point, think why should I pay so much more to buy a property when it is a considerably cheaper transaction south of the Border.

The latest statistics on Scotland’s property purchase levy, the Land and Buildings Transaction Tax (LBTT), may be the first sign that buyers are responding to these higher taxes and moving elsewhere. Revenue from the LBTT on residential sales collapsed at the start of this year with the first two months down £44.4m (a drop of 36.1 per cent) compared to the previous two months.

The largest fall occurred among people buying a home for themselves which saw a drop of £39.6m (down 44.0 per cent) comparing the first two months of this year with the last two of 2022. Revenue from second home buyers, landlords, and property investors (who pay a 6 per cent premium through the Additional Dwelling Supplement (ADS) on top of standard LBTT) fell by £5.0m (down 15.1 per cent).

Total revenue from both residential sales and non-residential sales (which are collated under the LBTT) was 37.1 per cent down in the first two months of this year falling from £166.8m to £104.9m.

David Alexander

There is little doubt that a lot of this reduction is due to a slowdown in the market because of the cost-of-living situation, high utility costs, and the continued impact of high inflation. Interestingly, the most buoyant part of the market was among second home buyers, landlords, and property investors. This group has remained more active than homebuyers as prices started to stabilise, but it should be remembered that the latest figures, although covering the months of January and February, record sales that occurred several months earlier prior to the increase in ADS which occurred in December. It remains to be seen whether the recent tax hike in the Scottish budget will have a negative impact on this section of the market.

Whilst you could argue that these figures are simply a seasonal blip, or reflect increased caution at a time when people are facing greater financial uncertainty, this could also be a harbinger of things to come. The concern is that if this is a more permanent fall in revenue from property due to the higher taxation levels then the Scottish Government will face a shortfall in its projected earnings for the coming year and subsequent years.

For the 2022-23 financial year it will undoubtedly reach its target of £797m revenue from residential and non-residential sales (the former makes up the bulk of this income). However, it has forecast revenue of £821m for 2023-24; £849m for 24-25; rising to £987m by 2027-28 which will be almost double the figure for 2020-21 which was £517m. These figures would seem very optimistic even if the market was strong but appear unlikely if the first couple of months of this year are replicated throughout 2023- 2024 and subsequent years.

It is clear that the Scottish government, along with all governments, regards the homebuyer and the property investor as a cash cow. But with just £50.9m raised in February (which is the lowest monthly figure since May 2021) this may be a source of income which is drying up. There is a potential deficit in property revenues in the next financial year of around £200m and every likelihood of this shortfall increasing year after year if the market remains subdued.

Revenue from the LBTT on residential sales collapsed at the start of this year

One immediate action which could be done to raise revenues would be to make house buying more attractive for the homebuyer and the investor by reducing the taxation on each sale to ease costs at a time when the market is being squeezed. This was introduced in England last year as a means of supporting housing while there remains a downward pressure on the market.

If property taxes were reduced to match England this policy would have a positive impact on the Scottish market. Contrary to the popular view reducing taxes generally increases revenue as it encourages higher sales volumes, and this action would mitigate against a substantial shortfall from property taxes for the Scottish Government in the coming years.

David Alexander is CEO of DJ Alexander Scotland Ltd