11 Jul 2012

Proposals for Scots Law-based Land and Property Tax

Proposals for Scots Law-based Land and Property Tax

Fiona Wildgoose, Conveyancing Partner, looks at the new proposals to replace Stamp Duty Land Tax in Scotland

Fiona Wildgoose, Conveyancing Partner, looks at the new proposals to replace Stamp Duty Land Tax in Scotland

On 7th June, 2012, the Scottish Government launched a consultation on the reform of Stamp Duty Land Tax.  New fiscal powers have been devolved to the Scottish Government under the Scotland Act 2012 which received Royal Assent on 1st May, 2012.  This fresh piece of legislation allows MSPs to set income tax rates in Scotland and enables Holyrood to borrow more money as well as devolving stamp duty, land tax and landfill tax amongst other things.

The proposal is to introduce a new property tax based on Scots Law.  The new Scottish Land and Buildings Transaction Tax would replace the existing UK-wide Stamp Duty Land Tax (SDLT), and the focus is on developing a new system of land tax for Scotland.

The beneficiaries under the new proposals will undoubtedly be first time buyers as the proposal is to raise the point at which the tax is payable to purchases of £180,000 or over, as opposed to the current threshold of £125,000.  At the moment, SDLT is paid on the whole price, rather than simply that part of the price which is above the threshold.  This ‘slab’ nature of SDLT has long been criticised, but under the new proposals this will be abolished so that purchasers only pay tax on that part of the price which is over the threshold.  However, to compensate for this, the tax rate paid on that part of the purchase price above the threshold will have to be much higher than the current rate.  The Government is proposing a set rate of tax of 7.5% on any part of the purchase price above the new threshold.

Whilst the new proposals will benefit some, the hefty new rate of tax proposed will mean that a lot of purchasers, in particular home movers moving up the property ladder, will be worse off under the new regime.  In reality, purchasers buying a home priced between £200,000 and £250,000, which would be a typical mid-market price bracket, will actually pay more tax under the new system than they do under the current one.  Particularly hard hit will be those buying a property just under the £250,000 threshold at which the current level of stamp duty rises from 1% to 3%.  They will end up paying a lot more tax than they would under the current system.  By way of example, at the moment a purchase price of £245,000 would give rise to a SDLT liability of £2,450 being 1% of the whole price.  Under the new proposals, the same purchase price would give rise to a tax liability of £4,875, being £65,000 (the amount over the £180,000 threshold) taxed at 7.5%.

Conversely, others buying more expensive properties will see either a reduction in the amount of tax payable, no increase in the tax they pay, or a smaller increase than those buying more affordable properties.  By way of example, someone buying a house at £260,000 will actually see a substantial reduction in the amount of tax payable.  At present, a price at this level, would give rise to an SDLT liability of 3% on the whole amount, being £7,800, whereas under the new regime the tax liability would be £6,000.  To add to the confusion, someone buying a property for £300,000 would see absolutely no change in the amount of tax they pay (£9,000 under both the current and new regime).

The differing results are largely down to the current ‘slab’ system of taxation which means that people just below an existing threshold pay less now than they would under the new system whereas some who currently face a big hike in SDLT because their purchase price is over a certain price will see big savings under the new system.

It seems clear that under the new proposals those worse off will not be the wealthiest in society but will be those buying typical family homes, quite often those with other dependents who have been particularly hard hit already by the current recession.  Whilst the proposed flat rate of tax would simplify the new system, it is arguable that a range of rates and new thresholds would minimise the impact of the change, although it would make the new system more complex and it is unlikely that any new system will be advantageous to all.  Arguably, the wealthier in society should still be expected to pay an increased rate of tax.

The new regime is due to come into effect in 2015.  The consultation period on the proposed new property tax is set to run for 12 weeks and it remains to be seen who will be the winners and who will be the losers under any new system introduced.

Fiona Wildgoose, Partner

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