Towards a Scottish Land and Building Transactions Tax

by Ken Gibb

I had a day out in Edinburgh today. I was part of a panel assembled by the David Hume Institute talking to the Scottish Parliament’s Finance Committee about the economic implications of the Scotland Act (2012). The Act expands devolved powers in a number of important respects including giving Scotland’s Parliament powers over 10p of income tax at each tax rate, widening borrowing powers and devolving two taxes – on landfill and for Stamp Duty Land Tax (SDLT). The tax changes create many economic risks not least in terms of behavioural responses to any prospective tax changes (which in turn impact on revenues) and how to negotiate the spending block adjustment that follows (e.g. the Scottish spending block is adjusted downwards on a one-off basis to account for the fact that stamp duty will be raised in Scotland). Getting this right is clearly very important.

My focus was on the land and property transactions tax. The Scottish Government is developing a new tax to replace SDLT called the Land and Building Transactions Tax (LBTT). It is presently going through the legislative process and is different from SDLT in one key respect – it will not be a ‘slab’ tax but instead is ‘progressive’. What this means is that instead of paying the highest eligible tax rate on the entire property value, there is a marginal progression, as with income tax, so that you only pay the highest rate applicable on the portion of property value above the relevant threshold (and for much of that value it will be zero-rated). This would also tend to suggest that a revenue neutral LBTT will require higher marginal tax rates. There are likely to be three tax rates, a 0% for the first portion and then two higher rates. However, the Scottish Government will announce these rates nearer the time of the tax’s introduction (2015-16) – so we are presently a little in the dark on these key questions.

The standard discussion points about SDLT are as follows. First, UK property transaction taxes are relatively low (as recently borne out by an OECD study in 2011).  Second, the revenue from the tax is strongly pro-cyclical but is also correspondingly unstable (it is the product of the tax rate, the price of housing and the volume of transactions). Third, it is as we saw a slab tax and this encourages bunching of property prices just below tax rate thresholds. Fourth, as a transactions tax, it may discourage mobility (the recent Mirrlees Review argued for its abolition on these inefficiency grounds). Fifth, regional variations in house prices mean that the burden of the tax varies in local markets (note that according to Register of Scotland figures, at local authority level in Scotland average property values can vary from less than £100,000 to more than £230,000).  Sixth, at the individual level, the tax is counter-cyclical in that rising prices push properties in to higher tax brackets slowing market activity while falling prices move properties into lower tax brackets encouraging mobility (as discussed in the JRF Housing Market Task Force report written by Mark Stephens). Moreover, unless, the tax threshold rates are regularly revalued, this means that there will be an element of ‘fiscal drag’ – as prices rise, transactions will slowly shift into higher tax rates discouraging mobility. Finally, SDLT is one of very few policy clubs left to the policy maker to intervene in the housing market – and it has been extensively used as a temporary stimulus.

What does this imply for the proposed LBTT? While it does away with the slab characteristics of the SDLT, until we know about the tax rates and plans for their uprating (i.e. periodic revaluation) we cannot say whether it will be a more or less efficient tax on that score. The tax will still be clearly pro-cyclical in revenue terms. On this point it is interesting to note that the OBR have predicted increases in revenues from the SDLT in the years ahead, premised presumably on a general housing market recovery. This seems a little heroic to me. In its negotiations over the spending block adjustment, the Scottish Government would be surely correct to view cautiously future revenue growth from this source.

On the Mirrlees point, there is a basic trade-off between the economic loss of a transaction tax inhibiting commerce and the revenue security of a tax on immobile property. However, Mirrlees is also making a wider point that housing taxation should be normalized and be taxed on the flow of consumption services and investment returns similar to other activities and assets. This would entail a tax on the annual rental value of properties in place of SDLT and council tax, and an end to investment tax advantages. This has much to commend it, as does a land value tax – at least in theory. Such long-term goals are shared by many housing economists, myself included, but the political unpopularity of housing tax reform keeps it hidden in the long grass.

So, we need caution about the future level of LBTT revenue.  We need to think carefully about the tax rates still to be chosen for LBTT and about the necessity of their regular revaluation. I also hope that the new tax will not be an easy target for interventionist schemes but instead will be allowed to do its modest counter-cyclical work relatively unimpeded. It will not change the housing system in Scotland but it could do a little good rather than the opposite.


Mirrlees, J et al (2011) Mirrlees Review: Reforming the Tax System for the 21st Century. IFS: London.

OECD (2011) ‘Housing and the Economy: Policies for Renovation’, in Economic Policy Reforms 2011 Going for Growth. OECD: Paris.

Stephens, M (2011) Tackling Housing Market Volatility in the UK. Joseph Rowntree Foundation: York.