Unintended consequences of stamp duty change
Regular readers of this column will be familiar with my views on land and buildings transaction tax (LBTT), which was introduced two years ago by the Scottish Government as a replacement for stamp duty north of the Border and that can be summed up as ill-conceived and counter-productive.
Property professionals warned that LBTT would seriously diminish activity within the higher sectors of the market, leading to a decrease in the tax paid per annum. This was contrary to government projections that by reducing the rate of tax on purchases on or below £325,000 and increasing it for everything above that figure, LBTT would be “tax-neutral”. In reality, thanks to draconian rates targeted at higher-value purchases, it has become “tax-negative”.
And unless there is a serious re-think from Holyrood soon, the government’s tax intake is likely to reduce further as a result of buy to let investors indulging in a “change of tactic” although perhaps this is the wrong expression because it all boils down to simple arithmetic which a sevenyear-old would understand.
The conventional buy-to-let sector is a broad church, especially in Edinburgh and Glasgow where residential investment properties range in price from sub£100,000 to more than £1 million. Until two years ago the investment demand for topend properties (e.g. the best New Town or Park Circus flats or large, luxury new-build apartments) was buoyant. However, had UK stamp duty been retained in Scotland, on a £1m purchase the investor would have paid £43,750 in tax whereas now he or she will pay £78,350 in LBTT, or £34,600 more than in, for example, York or Manchester.
In theory this should deter high networth individuals from investing in £1m properties north of the Border and in some cases does. However, for those who retain an interest in Scotland an alternative course of action has emerged – and, somewhat ironically, it’s all down to the ruling administration’s touchy-feely, wealth-distribuones, tion policies. Thanks to LBTT a situation has arisen where those investors who previously competed with owner-occupiers for high-end properties are now turning their attention to lower-value ones, putting them in competition with Mr and Mrs Joe Public.
And here’s why. Thanks to the catch-all attitude by SNP ministers that money can be taken from “rich” buyers (whoever they are supposed to be) and given to “poor” LBTT on the purchase of a £250,000 property is now £400 less than under stamp duty (i.e. £2,100 compared with £2,500). So quickly doing their sums, high net-worth individuals have calculated that by purchasing four flats at £250,000 rather than one at £1m, they can save themselves almost £70,000 in LBTT (i.e. the levy in total will be £2,100 times four equals £8,400, compared with £78,350).
True, there are downsides. Administrative costs for buying and renting out four properties are greater than for one and there is also an increased risk of the “hassle factor” from difficult tenants. But these are minor compared to the advantages. For a start, the combined rental income from the four smaller properties is likely to be superior to that from the larger and more-endowed one.
Of even greater importance is that four properties allows the owner to spread investment risk – e.g. he can take profit by selling on one but still remain in the market by retaining title to the remaining three. Or, on reaching an age when he starts to think about withdrawing from buy to let altogether, can do so gradually, which will help take advantage of any sudden price uplifts while offering a certain amount of protection during periods when the market goes through unexpected dips.
The consequences related above have shown it is simply not working as intended. By all means let’s have a “progressive” taxation system covering residential property in Scotland but let’s have one that is clearly thought out. David Alexander is managing director of DJ Alexander, letting and estate agents
It all boils down to simple arithmetic which a sevenyear-old would
understand