Out-Law News | 10 Oct 2014 | 4:54 pm | 3 min. read
Property law expert Alan Cook of Pinsent Masons, the law firm behind Out-Law.com, said that the "principle of the progressive nature" of the land and building transaction tax (LBTT) rates and bands was "welcome". However the initial rates, which are set out in the draft Scottish budget for 2015/16, could mean higher tax bills for institutional investors in commercial property and "knock-on effects" in the residential property market, he said.
UK stamp duty land tax (SDLT) and landfill tax will be 'switched off' in Scotland in April 2015, to be replaced by LBTT and a new Scottish landfill tax. At the same time, the 'block grant' Scotland receives from Westminster will be reduced by a corresponding amount. A new tax authority, Revenue Scotland, will be established to collect and administer the new taxes, in conjunction with Registers of Scotland and the Scottish Environmental Protection Agency (SEPA). The Scottish Parliament has also legislated for a tough new general anti-avoidance rule (GAAR) to apply to the devolved taxes. It will be stronger than the UK GAAR which only targets 'abusive' arrangements.
LBTT will be charged on a progressive basis, similar to the current income tax system, under which slices of the transaction price will be subject to LBTT at increasing percentages. UK SDLT is charged on a 'slab' basis, where the amount of the consideration determines a single rate of tax which is applied to the whole amount. The draft budget proposes that the first £135,000 of a residential property transaction would be free of LBTT; while a 2% rate would apply to the amount between £135,001 and £250,000 and 10% to the amount between £250,001 and £1,000,000. Any amount above £1 million would be taxed at 12%.
The first £150,000 of the sale or lease of non-residential property would be free of LBTT, according to the draft budget. The proportion of a non-residential sale between £150,001 and £350,000 would be taxed at 3%; while any amount over £350,000 would be taxed at 4.5%. For non-residential leases, any amount over £150,000 would be taxed at 1%. Non-residential leases will be taxed at 1% of the amount by which the net present value exceeds £150,000. The net present value is calculated by reference to the rent payable and the term of the lease.
"Under the rates and bands which have been announced, LBTT for residential purchases will be more than SDLT would have been for homes over approximately £325,000," said property law expert Alan Cook. "This means that purchasers of larger family homes, in particular those in the larger cities such as Edinburgh, Glasgow and Aberdeen, will pay more - in some cases, substantially more."
"If this slows down the housing market at that level it will have a knock-on effect further down the housing ladder. Residential developers are very concerned about the impact it could have on the market, and if it causes a slowdown in residential sales this will in turn impact on the construction sector and the wider economy," he said.
On commercial property, LBTT would be higher than the corresponding SDLT charge on purchases just over the £2m mark, he said.
"This means that pension funds and other institutional investors buying commercial property in Scotland, which will invariably be above this level, will face higher transaction costs than on the purchase of a comparable property elsewhere in the UK," he said.
"The danger is that institutional investors will opt to invest their funds in the lower tax environment elsewhere in the UK, which could have a significant negative impact on commercial development of new offices, retail and industrial properties in Scotland which rely on this institutional investment for the funding to make the developments viable in the first place. This in turn will impact the construction industry and the wider economy and make Scotland a less attractive place for inward investment," he said.
The Scottish government has said that the two new taxes will be 'revenue neutral', meaning that they should generate the same amount of tax as their predecessor UK taxes would have generated over the same period. However, they will "redistribute the burden of taxation", according to the draft budget document. According to Scottish government figures, 90% of residential taxpayers and 95% of non-residential taxpayers will be "no worse off" under the new system than they would have been had SDLT continued at the same rates.
The new landfill tax would be charged at £82.60 per tonne of taxable waste with a lower rate of £2.60 per tonne of taxable waste under the proposals set out in the draft budget; the same rates as planned elsewhere in the UK for 2015/16. The proposed credit rate for the Scottish Landfill Communities Fund would be set at 5.6% and funds would be distributed to projects within 10 miles of a landfill site or waste transfer station.