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How LBTT is Driving People to Sit Tight

What’s happening in the housing market?

In 2015, the Scottish Government replaced Stamp Duty with the Land and Building Transaction Tax (LBTT). This meant that the thresholds at which the tax is due have changed. The government argues that it will remove the distortions seen in the market and make the tax easier to calculate and collect. However, market observers think that it’s having another effect – people aren’t putting their properties on the market due to the high taxes that have to be paid on completion (when they purchase their new property).

How is this affecting the housing market?

The Scottish Government says that 93% of people have paid less tax (or no tax at all) since LBTT replaced Stamp Duty. But that ignores the fact that many ‘family’ properties now fall into a higher tax bracket for part of their tax liability, which means people are staying where they are. The tax on properties over £325,000 and less than £750,000 is 10%. On homes costing between £250,000 and £325,000, the tax is half of that – 5%.

Here’s how the tax is charged on properties:

Purchase Price/LBTT rate

Below £145,000 / 0%

Above £145,000 to £250,000 / 2%

Above £250,000 to £325,000 / 5%

Above £325,000 to £750,000 / 10%

Over £750,000 / 12%

So this threshold is causing problems, as people simply don’t seem to see the sense in paying that much tax. The government’s correct – people are paying less tax. But it’s because the tax is stopping people from moving, above a certain level, that there’s less tax being paid. No move means no tax.

Other unintended consequences

The upper end of the property market (on homes costing over £500,000) has been even more affected by LBTT. The new tax regime would see a tax bill of £23,350 for a property costing £500,000. In fact, the cost of a premium property (those over £500,000) has fallen in the past five years – from £572,000 to £554,000. If you compare the tax on a £750,000 house in Scotland with a similar on in England or Wales, the tax difference is marked. In Scotland your tax bill would be £48,350, compared to £27,500 in the rest of the UK. And this price fall also means that some buyers will be experiencing negative equity.

The economics of it

Many observers now think that the mid to top-end of the market is stagnating. And that will affect every level of the property market, including the very people who the government says will benefit most from LBTT – first-time buyers. If the number of sales continues to fall, then the government’s tax revenues will also fall. The Scottish Property Federation has reported that revenues generated by LBTT over the past year are £57 million less than government forecasts – because of lower sales. The number of sales has fallen for the first time in six years, creating even more demand for properties that are on the market.

The future of the market

The price of individual properties will continue to rise if demand isn’t met. Which will exacerbate the situation even further. The average price of a home in Scotland rose by almost 5% from July 2016, to £149,185. Over the same period, Edinburgh saw price increases of almost 10%. Experts think this is due to the fact that the average property price in Edinburgh of £243,920 is Scotland’s highest. And with less properties coming to the market, more buyers are bidding for each one. Unless the situation is looked at by the government, we think that the trend will continue and become even more magnified.

* Figures quotes are based on the property being a first home, and not a second home (as a second home now attracts a higher rate of LBTT).

 

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