David Alexander: Time for a rethink on property tax

Tax avoidance '“ the method by which accountants legally minimise their clients' annual contributions to the Treasury '“ is carried out away from prying eyes.
David Alexander is calling for LBTT to be replaced with an annual tax on all properties. Picture: John DevlinDavid Alexander is calling for LBTT to be replaced with an annual tax on all properties. Picture: John Devlin
David Alexander is calling for LBTT to be replaced with an annual tax on all properties. Picture: John Devlin

In Scotland, a more blatant form of avoidance is being conducted by a section of the general public under the noses of Holyrood.

I am referring to Land and Buildings Transaction Tax (LBTT), which was a social reform that was meant to be tax-neutral but which has led to an unexpected drop in income for the Scottish Government. To a left-leaning politician (and his/her special advisor) it must have seemed a bit of a breeze: reduce the tax on property purchases for those at the lower and lower-middle ends of the market and make up the deficit by hammering toffs able to afford prices of £600,000 and upwards. So everyone’s a winner – except of course for high-end buyers and they’d be unlikely to vote for a left-of-centre administration so no great loss there anyway.

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The former Labour Chancellor, Denis Healey, once declared that he was going to “tax the rich until the pips squeaked”. Well at the upper end of Scotland’s property market the pips have squeaked to such an extent that they’ve become silent, leading to a huge fall in overall tax take from transactions. For example, whereas LBTT on a purchase of £175,000 is £600, on a purchase of £900,000 it is £66,350; this means that 100 sales at the former price are required to bring in the same tax as one sale at the latter. Isn’t this taking “progressive taxation” just a tad too far?

At a time when the stock market is on a roll and economic confidence is high, there can be no other explanation for the dearth of high-end sales. It certainly has nothing to do with worries over Brexit because LBTT was introduced in April 2015 – over a year before the EU referendum.

The results are there for all to see, particularly in Glasgow’s prosperous outer suburbs and in Edinburgh proper along with its more affluent satellite communities. For example, the high rate of tax has led to an almost complete halt in the previous trend whereby a young couple with a growing family, living in a New Town flat, would upgrade to a family home in Gullane or similar part of East Lothian but no longer do so because of the tax bill. Meanwhile, householders with some ground and garden who would normally have also upsized, are building extensions instead because this can be achieved at much lower (tax-free) cost.

Politicians (of all the major parties, it must be said) are terrified of being associated with a tax on a person’s “main home”. But main residences are already taxed – in cases where the owners want to get on and better themselves. Consequently LBTT is a tax on aspiration.

In the short term I’d like to think the Scottish Government might carry out a review which would bring more balance (and fairness) to the current tax rates. In any event, cheaper LBTT has only brought marginal relief to first-time buyers and others who operate at the lower end of the market. A much bigger cost hurdle for them is the enormous deposits being required by mortgage lenders.

A longer term – and more equitable solution – would be to replace LBTT with an annual tax on all properties. I appreciate that some readers may baulk at this given that council tax is already based on property values – but why should first- second- third- and fourth-time buyers pay a tax on their property that other homeowners do not?

An annual LBTT, if spread among all properties, would be relatively small per household and all homeowners would potentially benefit as every house move would be free of tax. Such a system would, of course, only work if politicians resisted the temptation to view an all-encompassing residential property tax as a cash cow. Hopefully, the more responsible among them will have learned lessons from the effects of the current tax rates – and show a healthy respect for the law of unintended consequences.

• David Alexander is managing director of DJ Alexander