Do we need to do more on residential LBTT to support economic recovery?
The SPF’s latest analysis of LBTT figures published by Revenue Scotland amply illustrates the impact of the COVID-19 economic recession on the revenues produced by the tax. Despite signs of a recovery for non-residential revenue in the most recent month for which we have provisional data, the figures clearly demonstrate a marked reduction in revenue compared to pre-COVID expectations. This is not a surprise in the context of Scotland and the UK experiencing the steepest recessions in centuries. Yet the facts do beg the question of whether the policy response to Covid19 has been effective, and whether more needs to be done to give confidence to the markets as they adapt to the new property industry circumstances. Assuming the Scottish (and UK) governments intend to retain a tax on property and land transactions, this should also be a time to ask if the system of LBTT established prior to Covid-19 is effective for the purposes of supporting the markets and therefore securing a sustained approach to taxation on land and buildings.
The response of the Scottish Government to date has been to exempt all residential transactions of below £250,000 from LBTT. For higher value transactions, this will therefore mean a saving of £1,200. For homebuyers at this level this will be welcome, but possibly not a decisive fact or given the size of other financial commitments during a house purchase. The early indications following the ending of lockdown restrictions on house moves is that there has been a significant amount of activity as people complete delayed moves. The bigger question is what happens after this period of pent up demand is over?
One consideration is whether the threshold under which LBTT is exempted for residential LBTT is simply high enough. The equivalent UK move (for England and Northern Ireland) was to exempt all transactions up to £500,000 from SDLT. Property values do of course vary across the country but in high value locations such as Edinburgh then this threshold may not reach to many parts of the market. Even with an exemption of LBTT up to £250,000 a residential transaction of a property for £400,000 could cost over £11,000 in tax and this kind of cash on top of all other considerations may simply be too much for homebuyers in the current climate.
Should the scale of tax liabilities dampen the property markets then the government will see continuing squeeze on its revenues. Although the higher value transactions represent only a small proportion of all residential transactions, they also deliver the lion’s share of LBTT revenue. With an economy that is expected to take years to recover to its pre-COVID-levels there must therefore be concern that the number of these transactions may decline if people are less confident about taking on higher financial commitments.
Two further alternatives have been considered by SPF members. The first is whether a time limited discount on LBTT liabilities could be used by the government to provide direct support for house purchasers. This discount would have the benefit of being time limited and would not therefore disrupt the structure of LBTT while the economy recovers. A second longer issue is whether the government may still need to review its rates and thresholds structure – at SPF we have long believed that the threshold at which LBTT increases to a 10% liability is simply too low in Scotland and should be raised from £325,000 to £500,000. However, that may be a. Longer term issue at this stage as the country recover sits economic feet.