Scotland's punitive property tax regime defies explanation

When a major think tank states “it is hard to think of any economically rational strategy that would justify recent policy on Land and Buildings Transaction Tax (LBTT), which has made Scotland’s most ill-conceived tax ever bigger and more damaging” you would assume it would make policy makers review their ideas. Not a bit of it. Those were the words of the Institute for Fiscal Studies (IFS) in their report ‘Assessing Scottish tax strategy and policy’ yet LBTT remains central to the Scottish Government’s policies.

The IFS stated that “Scotland’s increase in the surcharge in land and buildings transaction tax (LBTT) on the purchase of second and rental homes, from 6 per cent to 8 per cent… continued a trend of increases in this ‘additional dwelling supplement’”, and “the move makes an already highly economically damaging tax even worse.”

It goes on to state: “The change will encourage owner-occupation but will make it even more difficult and expensive for those who remain in the rental sector – tenants (who are likely to face higher rents as a result of the policy) as well as landlords. And the policy does not just penalise the rental sector; it penalises transactions within the rental sector. Preventing a landlord who wants to sell their property to another landlord from doing so is bad for both landlords and tenants.”

Which brings us to the latest monthly statistics on revenues from LBTT which show that this is now £699.1m (18.6 per cent higher than same period the previous year) for the period between May 2023 and April 2024.

Of the £699.1m taxes raised £211.8m is from the additional dwelling supplement (ADS) which is charged on second homes and properties purchased by landlords and property investors to rent. This is now 30.3 per cent of the total raised and is £50.8m higher than the previous 12-month period.

Almost all the residential taxes arose from properties sold for more than £325,001. The 19,100 transactions above this threshold collected £405.1m which is 83.1 per cent of the total £487.3m raised in LBTT (this is the figure for residential sales with the ADS figures removed). This means that the average tax levied per transaction was £21,209.

The IFS understands that the current LBTT policy is simply political posturing which makes little or no economic sense but plays up to the idea that punishing ‘the rich’ is progressive. The fact that the majority of people who buy a house valued at over £325,000 would never consider themselves rich is irrelevant.

Yet the large amounts of tax paid by property investors is testament to their faith in the Scottish market. These taxes also do not seem to be deterring homebuyers. But we need a level playing field with our UK counterparts and we need – as the IFS point out – a proper tax strategy in which there is a reasonable explanation of why these taxes are so high and what benefits accrue from them.

There must be another way to raise revenue which does not see homebuyers and property investors as cash cows who can endlessly be taxed. If higher property and income taxes start to deter individuals and companies from future investments in Scotland, then far from being progressive taxation it will be regressive.