Changes to Land and Buildings Transaction Tax May be Bad News for Property Investors…..and Renters

Changes to Land and Buildings Transaction Tax May be Bad News for Property Investors…..and Renters

Changes to Land and Buildings Transaction Tax May be Bad News for Property Investors…..and Renters

On 17 December 2015, John Swinney, Scotland’s Finance Minister, delivered his Budget for 2016/17 at Holyrood. While Mr Swinney opted not to use the Scottish Government’s new power to alter Income Tax, there were major changes announced to Land & Buildings Transaction Tax (LBTT).

LBTT is the tax paid by home buyers in Scotland when they buy a property. Yesterday’s changes are focused on Buy to Let investors and those buying second homes. They are similar to the changes to Stamp Duty that the UK government announced last month for England and Wales.

In simple terms, from April 2016, anybody buying a second (or third, or fourth….) home will pay an additional 3% of the entire property purchase price in addition to the existing rate of LBTT.

Properties under £145,000 are currently exempt from LBTT. This means that an investor buying a second home below £145,000 would currently pay no tax. The new changes mean that this buyer would have to pay 3% of the entire purchase price. As you can see from the table below, the difference in the level of tax paid can be quite substantial.

Selling Price LBTT Paid When Property is the Buyer’s Only Home LBTT Paid When Property is Not the Buyer’s Only Home Difference in Tax Paid
£100,000 £0 £3,000 £3,000
£200,000 £1,100 £7,100 £6,000
£300,000 £4,600 £13,600 £9,000
£400,000 £13,350 £25,350 £12,000
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Clearly, the changes are aimed at furthering social equality by making properties more expensive for investors than they are for home buyers, thus reducing the upwards pressure on house prices. As tends to be the case though, the devil will be in the detail and there are still a number of questions to be resolved:

  • Will the new tax apply to somebody who buys a home with a view to renovating it, but continues to live in their current home until those renovations are complete?
  • Will the higher rate of tax apply to someone who buys a new home and rents-out their old property?
  • How will the government ensure that everybody who should be paying the new, higher rate of tax does so, even when they are acting as cash buyers?

More generally, there is a danger, in the short-term at least, that the changes could make things more difficult for sellers at the lower end of the market.

As it stands, a property seller looking to sell a one-bedroom flat in Edinburgh might find that several interested buyers are Buy to Let investors. These are of course not all ‘fat cats’, but many are people who have saved-up their entire lives and who want to put their pension savings into property. If demand from that sector drops, and these changes certainly seem to have that aim, then it will inevitably make it harder for sellers of smaller properties to find a buyer.

Additionally, it is possible that Buy to Let investors will look to protect their level of return on investment by pushing up rents, which would clearly be unwelcome news for anyone living in private rented accommodation. As many of those people are currently struggling to get onto the property ladder, there is a concern that the changes could hurt the very people it is meant to help.

With the changes not due to be implemented until April 2016, there is still time for many of these questions to be answered and the concerns to be addressed. However, it is important that this happens quickly.

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At MOV8, we were inundated with queries from worried buyers and sellers prior to the introduction of LBTT in April 2015. Back then, the details of the scheme were announced very late in the day. We can only hope that the same cannot be said for these new LBTT changes because no market likes uncertainty.

Whatever happens, there is no doubt that this tax will reduce the level of interest in properties that appeal to Buy to Let investors some time before this new tax is introduced on 1 April 2016, because the tax applies to properties where the ‘Date of Entry’ is on or after 1 April 2016, meaning that the sale will need to be agreed some time before this. We would therefore urge property sellers to get in touch with us sooner rather than later by emailing [email protected], calling 0345 646 0208 or filling in a valuation request, if they are thinking of selling their property in 2016 and they are concerned that this tax might negatively affect their prospects of a sale.

2 Comments

  1. Molly McKinney 3 years ago

    Considering purchasing a home in the Borders area of Scotland. We live in the US (originally from UK). I found your website to be very helpful and informative. Thank you.

    • Susan Cooper 3 years ago

      Hi Molly,
      I am glad you found our blog informative. If we can be of any help now or in the future assisting you with your property search in Scotland please do not hesitate to contact us.
      Susan

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