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Scottish tax: The LBTT supplement

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2nd Feb 2016
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On 27 January Scottish Finance Minister John Swinney introduced the Land And Buildings Transaction Tax (Amendment) (Scotland) Bill into the Scottish Parliament. It proposes a new LBTT supplement from 1 April 2016 onwards on purchases of additional residential properties in Scotland (such as second homes and buy-to-let properties) costing £40,000 or more.

Like the higher rates of SDLT to be implemented from the same date, the LBTT supplement seeks to support government housing policy. It is intended to protect opportunities for first time buyers to enter the housing market in Scotland, while also avoiding distortions resulting from the SDLT change south of the border.

Without the LBTT supplement, would-be purchasers of buy-to-let properties and second homes elsewhere in the UK might be attracted instead to Scotland, making it difficult for Scottish first time buyers to acquire a main residence – particularly at the lower end of the market.

Levied at 3% on the whole of the purchase consideration, the supplement will have a significant impact. Based on the average Scottish house price of £167,191 for the month of November 2015, LBTT will be £444 on a main residence or £5,460 (that’s more than twelve times as much) on a second home. Based on the average of £235,297 for Aberdeenshire, the most expensive region in Scotland for that month, the corresponding figures are £1,806 or £8,865.

Additional residential properties

The basic rules for the LBTT supplement resemble those for the higher rates of SDLT.

If the purchaser buys a residential property in Scotland and at the end of the effective date of the transaction they own only one residential property anywhere in the world, the supplement will not apply.

If they own more than one residential property at the end of the relevant day – for example if they own two residences, or a main residence and a buy-to-let property – the supplement will apply. In these circumstances, if they still own the previous main residence which they plan to replace, the supplement will be payable but may be reclaimed if the previous home is sold within the next 18 months. Only if the acquisition replaces a main residence sold within the previous 18 months will the supplement not be payable.

These proposals (like those for the higher rates of SDLT) may raise serious problems, even for taxpayers who generally own only one residential property. To avoid the supplement as a permanent cost on simply moving house, they must sell and then buy (or buy and then sell) within 18 months. If they want to buy before they sell, they will have to lay out the extra 3% tax (albeit perhaps temporarily) at a time when their finances may already be overstretched and perhaps propped up by expensive bridging.

Treatment of couples

For the LBTT supplement and the SDLT higher rates, the rules for determining whether you own more than one residential property will differ.

For LBTT, spouses or civil partners (unless no longer living together and not intending to do so again) are treated as one unit, and cohabiting couples are treated in the same way. Cohabitants are defined as persons living together as though they were either married or in a civil partnership, so the term applies whether they are opposite sex or same sex couples.

By contrast, for SDLT the treatment of spouses and civil partners as one unit applies unless they are separated under a court order or by a formal deed of separation executed under seal, but unmarried couples are treated as individuals who can establish separate main residences if the evidence supports this.

For both LBTT and SDLT, property interests of minor children are taken into account. For this purpose LBTT relies on the age of majority in Scotland, which is 16, while SDLT uses 18.

Non-residential property transactions

In mixed transactions or purchases of multiple dwellings, the acquisition of a dwelling may be subject to LBTT as a non-residential property transaction. However, the LBTT supplement may apply in such cases. By contrast, it appears that the SDLT supplement would not apply in similar circumstances.

Compliance issues

LBTT applies to properties in Scotland, but many purchasers will come from further afield. While most transactions will involve Scottish solicitors, there could still be substantial difficulties for buyers in understanding the finer points of the rules, and serious risks of non-compliance.

There might be particular difficulties in the case of overseas buyers. For example, if an unmarried individual from Italy or Greece buys a Scottish holiday home, what incentive will they have to pay substantial extra tax on the basis that they have a cohabitant who already owns a home?

It must be questionable whether Revenue Scotland have the resources needed to police the new provisions.

Donald Drysdale of Taxing Words is a freelance author and series editor of Bloomsbury Professional's Scottish tax list.

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