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Saturday, 11 October 2014

SCOTTISH TAX LESS TAXING

UPDATE 5 DECEMBER 2014
In the Autumn Statement on 4 December 2014 the Chancellor George Osborne changed Stamp Duty Land Tax from midnight that day. This change brings it much more in line with the Scottish LBTT, though the bands and rates are different. The examples below have not been updated and relate to the old SDLT. The description of the Scottish tax is accurate.

ORIGINAL POST
Anyone buying a property in Scotland from 1 April will pay no stamp duty. Instead they will pay a new Land & Buildings Transaction Tax. The Scottish government says the new tax will be fairer and 90% of home-buyers will pay less. It will raise the same amount of money. So it follows that the other 10% will pay more – in some cases a lot more.

Stamp Duty Land Tax
At the moment throughout the UK anyone buying a residential property has to pay Stamp Duty Land Tax – SDLT. It is a strange tax. Nothing is payable on a property bought for £125,000 or less. But once that threshold is crossed a 1% tax applies to the whole price – not just the amount above £125,000. That is why it is called a ‘slab tax’. So a home sold for £150,000 is taxed at £1500. Once the price goes over £250,000 the tax is 3% - again on the whole price. So a £250,000 home costs £2500. But a £250,001 sale would generate a tax of £7500. The next threshold is a 4% tax above £500,000, 5% on homes selling for over £1 million and a 7% tax on those over £2 million.

Land & Buildings Transaction Tax
The new Scottish tax is very different. It starts later – not until a sale exceeds £135,000. And then the tax is only levied on the excess above that level. It starts at 2%. So on a £150,000 property the tax works like this. Take £135,000 from £150,000 which is £15,000 and multiply it by 2% which gives tax of £300. A lot less than the £1500 SDLT. The 2% tax applies up to £250,000 when it rises to 10%. But again that is only due on the amount above £250,000 plus of course the 2% on the amount between £135,000 and £250,000. But that still means any home bought for £324,285 or less will pay less tax in Scotland than in the rest of the UK from April. Another band taxed at 12% begins at £1 million. Some very expensive properties will pay almost double under LBTT compared with SDLT.

The table shows how the taxes compare.

Sale price
SDLT
LBTT
LBTT-SDLT
£125,001
£1,250
£0
-£1,250
-100%
£135,000
£1,350
£0
-£1,350
-100%
£150,000
£1,500
£300
-£1,200
-80%
£200,000
£2,000
£1,300
-£700
-35%
£250,000
£2,500
£2,300
-£200
-8%
£250,100
£7,503
£2,310
-£5,193
-69%
£275,000
£8,250
£4,800
-£3,450
-42%
£300,000
£9,000
£7,300
-£1,700
-19%
£324,285
£9,729
£9,728
£0
0%
£400,000
£12,000
£17,300
£5,300
44%
£520,000
£20,800
£29,300
£8,500
41%
£600,000
£24,000
£37,300
£13,300
55%
£750,000
£30,000
£52,300
£22,300
74%
£1,000,000
£40,000
£77,300
£37,300
93%
£1,100,000
£55,000
£89,300
£34,300
62%
£1,500,000
£75,000
£137,300
£62,300
83%
£2,000,000
£100,000
£197,300
£97,300
97%
£2,100,000
£147,000
£209,300
£62,300
42%
£5,000,000
£350,000
£557,300
£207,300
59%

Stamp duty is widely resented. Buyers have already struggled to save up a big deposit, paid a fee to the lender, a surveyor, a broker and a solicitor, and will probably have paid for removal costs. So having to pay a tax as well – which is demanded before the deal is done – can sometimes be the last straw. And if it is difficult for first time buyers it can be doubly so for those who trade up. Crossing one of the slab thresholds can put the tax up by thousands of pounds.

The Scottish government says that 90% of sales will attract a lower tax and 10% will pay more. It also says that the tax take will be the same. So a lot of people will pay a few hundred or thousands of pounds less. And a few will pay some thousands or tens of thousands of pounds more. Although the LBTT will be welcomed by the majority the few with expensive houses will resent it even more than Stamp Duty.

England, Wales, and Northern Ireland
Given the dislike of Stamp Duty, would a version of the Scottish tax in the rest of the UK be more popular in the rest of the UK?

An analysis for Money Box by Savills estate agents found that the vast majority in England and Wales would pay less under the Scottish system. In the north of England, the east and the Midlands between 91% and 96% would pay less. Even in the south the great majority would benefit – 85% would pay less in the south-west and 73% in the south-east. In Northern Ireland I estimate that 97% would pay less and in England as a whole 87% would pay less with 13% –  about one in eight – paying more. Those two figures are my estimates not Savills’.

Only in London would most buyers pay more – and it is small majority at 53% paying more and 47% paying less. The resentment against Stamp Duty is particularly strong in London where in many Boroughs even a modest size family home can incur tens of thousands of pounds in tax. But these same homes will usually exceed the £325,000 balance point and cost more in a version of LBTT than it does in SDLT.

HOME SALES TO YEAR END JULY 2014

Up to £325,000
Over £325,000
Mean
London
47%
53%
£501,006
South East
73%
27%
£299,851
South West
85%
15%
£233,236
East England
91%
9%
£250,698
West Midlands
92%
8%
£180,842
East Midlands
94%
6%
£170,227
North West
94%
6%
£161,619
Yorks & Humber
94%
6%
£161,613
Wales
95%
5%
£157,041
North East
96%
4%
£143,863
N. Ireland*
97%
3%
England
81%
19%
Scotland**
90%
10%

Source: Savills from Land Registry data.
* PL estimate
** Scottish government

Pressure to change
Once the new LBTT begins in Scotland comparisons with SDLT in the rest of the UK are bound to grow. And for the vast majority the comparison will demand change. But of course in Westminster where the decision is made the argument would go the other way. So it could mean that demands grow for a version of LBTT in the rest of the UK outside London and perhaps a different tax exclusively for London that took account of the very high prices in many Boroughs. There are even suggestions that London should be able not just to set its property sales tax but to keep the proceeds as well. And that could set the capital on the road to its own form of devolution.

Further Information
Scottish Government announcement with links to a LBTT calculator
HMRC Stamp Duty Land Tax calculator