Podcast: An in-depth discussion all about property tax in Scotland

Topics

On this week's episode of the ESPC Property Show, Paul & Megan are joined by well renowned tax expert, Alan Barr (Partner at Brodies LLP) to discuss Scottish property taxation including Land & Buildings Transaction Tax and Additional Dwelling Supplement. 

Watch the episode here↓

Listen to the episode on Spotify or Apple Podcasts or watch the episode on YouTube

Key Insights

What is Land and Buildings Transaction Tax (LBTT)? 

LBTT is Scotland's devolved property transaction tax, a direct replacement for Stamp Duty Land Tax (SDLT) in England and Wales, introduced in 2015. 

The Scottish Parliament has complete control over LBTT rules and rates, making it Scotland's most significant fully devolved tax. 

While similar in structure to SDLT, LBTT has different rates and some distinct rules. Generally, Scotland levies less tax on lower-value properties but significantly more on higher-value properties compared to England. 

Purpose and Importance of Property Taxation 

Governments levy property tax to raise funds, as property is a tangible and unavoidable asset. It can also be used to influence economic behaviour, by incentivising or discouraging certain activities (e.g., property ownership patterns). 

LBTT generates approximately £1 billion annually, which is relatively small compared to Scottish income tax (£19 billion) or business rates and council tax (£6 billion). However, it is the largest fully devolved direct tax. 

Historical Context 

Property taxation has existed in Scotland since the 17th century, originally known as "cess," predating income tax. The original concept of stamp duty originated in the Netherlands. 

Current LBTT Rates and Thresholds (Effective as of the podcast recording) 

LBTT is applied on a "slice" basis: 

  • 0%: Up to £145,000 
  • 2%: On the portion between £145,001 and £250,000 
  • 5%: On the portion between £250,001 and £325,000 
  • 10%: On the portion between £325,001 and £750,000 
  • 12%: On the portion above £750,000 

You can calculate how much LBTT you would pay on a property by using the ESPC Property Tax calculator. 

Comparison with England 

The 12% rate in Scotland kicks in at £750,000, whereas in England, it applies from £1.5 million. 

First-Time Buyer Relief 

First-time owners (not just buyers) receive an extended 0% threshold up to £175,000, offering a maximum saving of £600. This relief does not apply if an individual has previously owned property anywhere in the world, including outside Scotland or the UK. 

Additional Dwelling Supplement (ADS) 

ADS is an extra tax on the purchase of additional properties, such as second homes or buy-to-let investments. It serves to raise revenue and discourage specific behaviours like owning multiple empty properties or extensive buy-to-let portfolios. 

ADS started at 3% in 2016, and increased to 4%, then 6%, and is now 8% of the total purchase price. This is considerably higher than the 5% equivalent in England. 

Quirks of ADS: 

  • It applies if you own any other property anywhere in the world, even a shared interest in a family holiday home. 
  • A significant quirk is that if an individual has been renting their main residence but owns another property (e.g., a buy-to-let), they will pay ADS when purchasing their first owned main residence, even though they are effectively replacing their main home. 
  • Cash flow issues arise if buying a new main residence before selling an existing one; ADS must be paid upfront and can be reclaimed if the previous main residence is sold within three years. 
  • The tax also applies to unmarried cohabiting couples if one partner owns another property. 

Impact of Unchanged Thresholds ('Fiscal Drag') 

LBTT price thresholds have remained unchanged since 2015. Due to rising house prices, a phenomenon known as "fiscal drag" means a greater proportion of properties are now falling into higher tax brackets, effectively acting as a stealth tax increase. 

In 2015, 32% of properties were below the taxation threshold; this has now reduced to 5%. 

International Comparisons and Potential Improvements 

Many countries rely on annual property taxes rather than transaction taxes. A move towards consolidating existing property taxes (rates, council tax, LBTT) into a single annual property tax or a land value tax (taxing increased value from development) is sometimes discussed. 

Suggestions for LBTT Regime Improvement: 

  • Re-evaluate ADS: Address the fairness and effectiveness of ADS rates and its quirks, particularly for situations like divorcing couples or individuals unintentionally caught by its provisions. 
  • Improve Cash Flow: Streamline the process for reclaiming ADS when replacing a main residence to avoid significant upfront cash flow burdens, especially if sales are unexpectedly delayed. 
  • Regionalised Thresholds: Consider introducing regional differences in LBTT thresholds to reflect varying property values across Scotland, promoting greater fairness for buyers in higher-priced areas like Edinburgh. 

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