The announcement last week by John Swinney on the rates for the new land and buildings transaction tax created mild excitement in our office.
We accountants do not get excited too often. It is the first time the Scottish Parliament has introduced a new tax; the first time tax rates will differ from the rest of the UK.
The current UK system of stamp duty land tax (SDLT) levies tax on the purchase or lease of property. There are different rates for residential and commercial property.
SDLT is often referred to as a ‘slab’ tax. Once a price threshold is breached the whole purchase price is taxed at the relevant rate.
For example, under the current system if you buy a house for under £125,000 then you will pay no SDLT. If you buy a house for £125,000 or more you pay 1% on the full price paid.
The new rules and rates have now been announced and will come into force from April next year. Any property bought in Scotland from then will be taxed under the land and building transaction tax (LBTT).
Under LBTT it is only the amount in excess of each rate band that is taxed at the higher rate. There are different rates for commercial and residential property. For residential properties no tax is paid on property below £135,000.
For purchases of £135,000 to £250,000 a rate of 2% is paid on the amount above £135,000.
Once the property is above £250,000 the rate applied increases to 10% until the price reaches £1 million. Above £1m the excess is charged at 12%.
The most expensive houses will see the largest increases in tax. For anyone buying a house up to £325,000 the costs will be lower under the new LBTT rules. Government figures suggest 90% of house purchases are below £325,000.
For farm and landowners the rates for commercial property are of more interest. These will be the rates applied on land and farm purchases. Again the tax will be progressive, so you pay the relevant rate only on the excess above the threshold.
For purchases up to £150,000 there is no tax due; 3% from £150,000 to £350,000; and 4.5% for any part of the price above £350,000.
This is a positive change as the current SDLT regime could be unfair in certain circumstances. For example, buying land at £250,000 had a 3% charge on the whole purchase price, so £7,500 in SDLT. A price just below £250,000 was charged at 1%, so the tax cost was £5,000 less.
So how will the changes impact on the rural economy?
In the short term I suspect the top end of the residential property market will see a slight movement downwards to compensate for the additional costs for the buyer.
On a £400,000 house the buyer will pay £5,300 more.
However, it is the most expensive houses that will see the largest tax increases.
A £1m country mansion will see the tax cost on purchase rise by £33,300.
To put this in perspective there were around 141 houses sold at above £1m in Scotland last year.
I expect the increase will not be enough to scare off the buyers, but there will be a rush to conclude house purchases at the top end of the market before next April.
For farm and land purchases it will not be until the price reaches £2m that more will be paid under the new system. Above £2m the increase in rate is % so relatively modest.
I do not envisage the changes will alter the land market in any way.
There is a bigger question on how our Scottish Government uses 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.
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.
While there are many failings in the UK tax system, I do not believe we need wholesale changes. The training, software changes and resources would be a massive cost to our economy.
LBTT has clearly increased the cost to the more wealthy, which could be an indication of how future tax changes may go.
On balance I think the changes are positive, although I believe the tax rate of 10% on prices above £250K is too high. The rate should have been lower or the starting band higher.
For future changes in the tax system I feel we need to tread carefully and slowly. We need to ensure Scotland remains a place that attracts overseas and UK investors.
We have seen many from overseas buy land and estates in Scotland. These investors will spend money locally, often building and improving their estates and employing locally. 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.
* Andy Ritchie as a partner with Campbell Dallas, Perth.