The New Scottish Transactions Tax: Setting a Precedent?

by Ken Gibb

The New Scottish Transactions Tax: Setting a Precedent?

Much has been written on the new Land and Building Transactions Tax (LBTT), launched last week by John Swinney, at least in terms of its principles and the new tax rates to be introduced next year. Commentators like Mark Stephens have written clearly about several of the key issues that will arise[i]. I wrote a post (Towards a Scottish Land and Building Transactions Tax) back in April 2013.

Applying to residential properties from April 1 2015, the tax will have the following structure:

£0-£135,000 – zero-rated

£135,000-£250,000 – 2%

£250,000 – £1 million – 10%

Over £1 million – 12%

I would make the following general points about the LBTT:

  1. Transactions taxes may raise a decent amount of revenue but they distort mobility decisions and have market consequences (Mirrlees suggests they should be abandoned n favour of recurring property taxes).
  2. Moving to a marginal tax rather than the slab basis of the Stamp Duty Land Tax (SDLT) is an important improvement. Now people only pay the highest applicable marginal rate on the top most portion of the property value not in its entirety. This should lessen though not completely remove valuations and prices agreed just below tax thresholds.
  3. Both SDLT and LBTT have the unhappy characteristic that they will have volatile revenues which will be hard to predict. They depend on property values, tax rates and the volume of transactions – recent experience suggests considerable variation in the revenues generated, a point we return to below.
  4. There will be considerable continuing incentives to follow UK Governments and tinker with the tax for economic and political reasons. Far better to leave it well alone.

The other big issue for me is the revenue take associated with LBTT and not just its volatility to the Scottish Government. Critically, a negotiation has to be had with HM Treasury to decide on how much the Scottish Block should be adjusted because we are now raising the LBTT rather than getting a share of SDLT. The Scottish Government reckons it will be worth £558 million in 2015-16. What principles should the Scottish Government adopt? 

A press release by the Scottish Government released last week said: “the Scottish block grant will be adjusted to recognise that the tax receipts will flow to Hollyrood and not to the Treasury in London”. It may be that this has already been sorted out within Government but I cannot find any evidence of the principles adopted. The tax is volatile so would you take last year’s receipts, a moving average or an estimate based on expected receipts depending on how the market will move going forward? Over-estimating receipts will permanently disadvantage the net fiscal position for Scotland so this is a genuinely important negotiation. 

This is not of course just a matter for LBTT, important as that is to the public finances and the long term consequences of a one-off decision. It is also setting a critical precedent for further devolution of taxes and spending that will impact on the future negotiations surrounding those additional powers that come from the settlement of the pre-referendum ‘Vow’. This apparently minor issue from the implementation of the 2012 Act could therefore have a much wider set of repercussions. How seriously are our political masters in Holyrood taking that precedent setting exercise?