Property transactions will be subject to a fairer taxation regime from April 2015, following the passing of the Land and Buildings Transaction Tax (Scotland) Bill by the Scottish Parliament. But homebuyers in England and Wales are not going to see any change.
Up until now the same Stamp Duty Land Tax (SDLT) legislation has applied in both England and Scotland. But in 2012 the UK government agreed to devolve various tax-raising powers to the Scottish Parliament, including power to introduce its own taxation system for property transactions.
One of the frequent complaints about the current SDLT system is the broad ‘slab’ tax bands. For example someone buying a home for £250, 000 will have to pay £2, 500 tax at 1%, but if they paid just £1 more the tax would leap to £7, 500 at 3%.
This is because the tax is charged on whole of the purchase price at the rate for the relevant band. So a property changing hands for just over a threshold point will attract considerably more tax than one selling for just a few pounds less.
Of course homes rarely sell for prices just over the threshold points, but this leads to artificial bunching of prices at just below these points. It also causes buyers and sellers to try and agree artificial ways of saving tax, such as the buyer agreeing to pay artificially inflated prices for furnishings, so that the seller can get a bit more money while the buyer avoids a SDLT hike.
Changing from a ‘slab’ structure of taxation to a progressive tax structure
The new Scottish Land and Buildings Transaction Tax (or LBBT) will introduce a progressive tax structure similar to the income tax system. This will avoid the sudden increases in liabilities that are a feature of the slab system of SDLT, and which create distortions in the housing market.
Full details of the rates and bands for the new Scottish Land and Buildings Transaction Tax (or LBBT) remain to be fixed. However the new legislation states that there will be a nil rate tax band and at least two other tax bands. There is also provision for different rates to apply to residential and commercial property respectively.
But the major difference from the present SDLT regime lies in the progressive structure of the new tax. Rather than just applying a single tax rate to the whole purchase price, the amount within each band will be taxed at the relevant rate. If the price covers more than one band the amounts for each band are then added together.
If this system was applied to the present tax bands and rates, the buyer of a property priced at £250, 000 would pay just £1, 250 tax rather than £2, 500. This would be calculated as follows:
- Nil on the first £125, 000.
- £1, 250 on the next £125, 000 at 1%
If the price was £300, 000 then an additional sum of £1, 500 would be added, i.e. 3% on £50, 000, making a total of £2, 750 (rather than £9, 000 at 3% on the whole of the price. )
Of course these figures are just to illustrate how the new system will work – the actual bands and tax rates which will apply still remain to be fixed.
UK Government still ignores calls for SDLT reform in England
Despite calls for reform from many quarters, the UK government has shown no signs of considering any other changes to the SDLT system. So homebuyers in England and Wales will have to endure the present regime for the foreseeable future.
If anything, the present government seems more interested in creating more tax bands and higher and higher rates, so that at the top end of the market buyers must now pay 7% (or even 15% in some cases. )
The injustices of the present system have led to a growth industry in tax avoidance schemes, which in turn has led the government to introduce harsher anti-avoidance regulations. Perhaps if they introduced a fairer system people would be less concerned to try and avoid paying up.
It is also interesting to note that as part of the process in introducing its new land tax, the Scottish Parliament consulted widely and invited comments on its proposals. This is in stark contrast to the current SDLT legislation which was originally brought into effect with absolutely no prior announcement or discussion (or even discussions between government departments. ) Consequently there were many errors and anomalies in the legislation which led to confusion and had to be hurriedly corrected.
The government has frequently said that it wants to see increased activity in the housing market to boost economic growth. There is no doubt that the current Stamp Duty system, with its increasingly unfair slab structure, operates as a brake holding back would-be purchasers. So wouldn’t it be better to bring in a new system across the whole of the UK, rather than just leaving it to the Scots to benefit?