As a specialist in land acquisition and housebuilding, it was encouraging that revenue from the Land and Building Transaction Tax (LBTT) in the last full financial year rose 12.8 per cent to £546 million, up around £40m on budget and assisted by a buoyant Edinburgh market, confounding predictions that the Scottish Government would “come a cropper” due to their approach to the former Stamp Duty Land Tax.
However, as we edge daily towards the prospect of a Brexit no-deal scenario, serious questions arise as to whether this level of tax revenue is sustainable. It may be prudent for Holyrood ministers to now consider options to maintain and stimulate transactional activity to ensure LBTT revenues continue to make a substantial contribution to Scotland’s finances.
Market soundings indicate that house purchasers, unsure if the crucial Brexit tie will be decided in extra time, are putting their “foot on the ball” over making a reservation or commitment to purchase a new home. There is no sense of crisis, but the rate of reservations of new-build homes is beginning to shade a little and the most logical explanation appears to be Brexit.
If the housing market does catch a cold, and hopefully it will be a mild sniff as opposed to full-blown flu, what might the Scottish Government do to embolden home buyers, encourage more investment in much-needed housebuilding programmes, and maintain LBTT revenues?
We have to acknowledge that LBTT rates at the higher end of the Scottish market are at odds with the English top-end market and some would consider them penal and uncompetitive on a cross-border basis.
For example, buying a property in Scotland in the £325,000-£750,000 price bracket will attract LBTT of 10 per cent and any property over £750,000 a hefty 12 per cent of value. In England, the Stamp Duty equivalent on a property valued between £250,000 and £925,000 is only 5 per cent, doubling to 10 per cent between £925,000 and £1.5m, and capped at 12 per cent on any home valued at more than £1.5m.
Certainly, the higher tax rates in Scotland are not helpful in encouraging people to buy in Scotland and discourage inward investment. Now may be the time for the Scottish Government to soften their stance regarding the higher rate bands and to offer a Brexit-related LBTT holiday covering the period leading up to and post-Brexit. A relaxation on LBTT and a readjustment of rate bands would create a stimulus, particularly at the upper end of the market that generates a disproportionate slice of LBTT revenue, and which is typically composed of discretionary buyers who don’t need to buy. It would also create some equality with the English market.
I wouldn’t necessarily argue that a decision to amend the rates should at this stage be permanent, but could simply be for a defined period that encourages continued transactional activity in a time of significant uncertainty. If revenue numbers were not adversely affected by such a “holiday”, government might choose to elongate the policy and level the playing field with England.
Only last month, Bank of England governor Mark Carney predicted that a disorderly exit from the EU could see house prices fall as much as 35 per cent over a three year period.
Cautious house buyers may be tempted to wait to see if this comes to pass. Such a hiatus would be disastrous on many fronts. A defined LBTT relaxation period would send a strong message that now is a good time to buy and would help sustain transaction levels and tax revenues in the uncertain months ahead.
The Scottish Government have been innovative in helping aspiring home owners take their first steps on to the property ladder. Now is the time to continue to be bold, innovate and demonstrate forward thinking, so transaction levels, and as such LBTT receipts at the higher end of the housing market, are maintained despite the gathering clouds of Brexit.
Rodney Whyte, partner and property and planning specialist at legal firm Pinsent Masons.