The Holyrood Parliament is expected to approve the Land and Building Transactions Tax (Scotland) Bill today. What it won’t do is set out what the tax rates will be when it comes in to effect in April 2015.
The idea behind the tax is admirable. A graduated tax in which you pay a higher rate of tax only on the part of the purchase price above a certain level is clearly better than the current ‘slab’ arrangement by which you pay a higher rate of tax on the whole purchase price once you get above a certain threshold.
But it’s not all plain sailing. The current proposals would see some mid-market buyers paying more in tax than they currently do. And almost everyone buying for between £200,000 and £300,000 could face steeper rises in tax than is desirable.
It’s all down to the tax rate applied and the number of tax bands that are introduced. The Scottish Government consultation assumed a 7% tax rate applied to the amount buyers pay over £180,000.
If that is applied in real life, anyone buying a house for between £210,000 and £249,000 will pay more than they currently do. These are not the mansion buying rich, but people who are buying typical family homes. Even those buying a property between £250,000 and £300,000 will face a steeper hike in tax than is necessary.
The solution is to introduce more tax bands. Indeed, the Scottish Government considered an entry level tax band of 2% (up to £250,000) followed by a higher band of 9.5% for properties above £250,000 but has been surprisingly quiet about it recently.
That seems to have been abandoned because the entry level tax band would have to be applied to cheaper properties (sold for over £125,000) to generate the same revenue. But even the Government’s own figures show that 45% of Scottish properties are bought for less than £125,000, so most first time buyer properties would not be affected by a tax that starts at this level.
Moreover, a 2% tax on the sale price above £125,000 is not going to be a large figure for most buyers. Someone buying a house at £150,000, for example, would pay just £500 in tax, £1,000 less than they would pay today. As the chart above shows, a lower threshold for the tax together with a low tax rate gives a smoother increase in tax as property values increase with fewer sudden leaps and the great majority of buyers paying less than they currently would.
It is hard to avoid the suspicion that the Government has avoided publishing the tax bands it will apply when this tax comes in to force to avoid controversy while the bill is being debated by Parliament. It’s a good idea in principle, but whether it will be fair to mid-market buyers depends on how the Government sets the tax rates. It should spread the load with more tax bands.