Scotland’s big property tax shake-up could slow construction and deter commercial investment, experts have warned.
From next April the Land and Building Transaction Tax (LBTT) is replacing the current UK system of Stamp Duty Land Tax (SDLT) levied on the purchase or lease of all Scottish property.
Announcement by finance secretary, John Swinney, in last month’s draft Scottish Budget for 2015-2016, it’s estimated LBTT will raise between £500m and £600m per year.
Non-residential sales and leases will be taxed at one per cent of the amount by which the net value exceeds £150,000. Values between £150,001 and £350,000 will incur a three per cent levy, while any amount over £350,000 would be taxed at 4.5 per cent.
The new bands and rates have been welcomed for the benefit they will provide to low-end home buyers but criticised for leaving institutional investors and businesses to pick up the tab.
“The principle of the progressive nature of the LBTT rates and bands is welcome, but the approach taken by the Scottish Government to setting the bands means that not only are there winners — namely buyers of average priced homes in Scotland — but there are also significant losers,” explained Alan Cook, a commercial property specialist and partner with law firm Pinsent Masons.
Purchasers of larger family homes, in particular those in Edinburgh, Glasgow and Aberdeen, will pay substantially more. “If that causes a slowdown in residential building it will, in turn, impact on the construction sector and the wider economy,” he added.
“There is also a risk the new system could deter pension funds from investing in Scottish commercial property portfolios, adding momentum to the slowdown in construction.”
An increase in tax for commercial property transactions at £2.12m or above would also put Scotland at a disadvantage to other regions in the UK. “Institutional investors, such as pension funds, buying commercial property in Scotland will face higher transaction costs than on the purchase of a comparable property elsewhere,” predicted Cook.
“The danger then is that fund managers will opt to invest their money in the lower tax environment elsewhere in Britain, which would have a negative impact on commercial development of new offices, retail and industrial properties in Scotland.”
Other experts agree. Andy Ritchie is a partner with Perth accountants Campbell Dallas. On balance he believes the changes are positive. “For future changes in the tax system I feel we need to tread carefully and slowly,” he added. “We need to ensure Scotland remains a place that attracts overseas and UK investors.
“We have seen many from overseas buying land and assets and investing in Scotland, but the world is a small place and we do not want Scotland to be perceived as a place where it is expensive and difficult to buy property.”
There are long-term fears among his business clients, however, over how the Scottish Government intends to use its tax-raising powers. “Stamp duty land tax is not difficult to change or particularly controversial. It is relatively easy to apply the tax and administer it,” Ritchie said.
“To introduce a new Scottish income tax or corporation tax would represent a monumental change. A tinkering with rates would be possible, but a new tax system would prove massively costly and unsettling for business.”