Governments play land tax ping pong

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Donald Drysdale looks at an example of tax competition at work within the UK, and wonders what it achieves.

SDLT and LBTT rates

Stamp duty land tax (SDLT) was introduced in 2003. Until recently it was levied throughout the UK on property acquisitions, based on a cumbersome and unfair slab structure of rates, which distorted the housing market and encouraged tax avoidance at the margins of each rate band.

Then the Scottish government decided that its newly devolved land and buildings transaction tax (LBTT), to replace SDLT in Scotland from 1 April 2015, would sweep away the outdated slab structure in favour of progressive rates for both residential and non-residential properties. The proposed LBTT rates were announced on 9 October 2014.

The UK government, clearly impressed by the ingenuity of the Scots, followed suit on 4 December 2014 by introducing progressive rates of SDLT for residential properties, but for some unaccountable reasons retained the slab structure for commercial properties.

Then Westminster had second thoughts. In the recent Budget George Osborne announced the abolition of the slab structure for non-residential properties with effect from 17 March 2016.

Additional residential properties

Other changes are afoot. The 3% supplement on SDLT for additional residential properties such as buy-to-let dwellings and second homes was proposed by the Chancellor on 25 November 2015 and will apply from 1 April 2016.

Not to be out-done, the Scottish government followed suit three weeks later, proposing a broadly similar supplement on LBTT from the same date. Depending on location, each supplement (SDLT or LBTT) may double or treble the land tax charge on acquisition of an average-priced dwelling.

Even for those without a buy-to-let property or holiday home, the supplement could become payable on simply moving home. To help guard against this in the case of SDLT, the UK government proposed on 28 December to allow an 18-month period to accommodate the replacement of a main residence. This seemed more than adequate in London and the south east, but less obviously so in remote areas where the housing market might be slower.

On 28 January Holyrood too proposed an 18-month period for replacing a main residence. While this replicated the SDLT proposal for LBTT purposes, it seemed inadequate in the context of the slower property market in many parts of Scotland. Nevertheless the LBTT proposals, including the 18-month period, were enshrined in the Land and Buildings Transaction Tax (Amendment) (Scotland) Bill, which was passed by the Scottish Parliament on 8 March.

In the meantime the Chancellor had re-considered. In his Budget on 16 March he announced that for SDLT, instead of 18 months, a three-year period will be allowed for replacing a main residence.


Another distinguishing feature between the SDLT and LBTT supplements is in the treatment of cohabitants. An unmarried couple (whether opposite or same sex) is treated for LBTT as a single unit which can have only one main residence; for SDLT they are two separate individuals, each of whom may have a main residence if the facts support this.

The implications of this are baffling. Imagine a cohabiting couple with separate working patterns which justify (say) one of them living mainly in Edinburgh and the other mainly in London – a position not unusual in the financial services sector. If the Edinburgh home is bought before the London home, no supplement will be payable on either home. If the other way around, the LBTT supplement will be payable on the Edinburgh home.

Direction of travel

From 1 April 2016 an individual or couple moving house from Scotland to a new location south of the border will be treated more favourably than an individual or couple moving house into Scotland.

Those moving south will have three years to replace their main residence without facing the SDLT supplement. If they are cohabitants (as 17% of UK couples currently are), and their circumstances allow, they will each be able to own a main residence without incurring the supplement.

By contrast, those moving north will have only 18 months to replace their main residence, otherwise they will incur the LBTT supplement. If they are cohabitants, they will only be able to have one main residence for LBTT purposes – even if their pattern of living would have justified separate main residences as a matter of fact.

What’s to be done?

With the Holyrood elections looming, the sabres of most Scottish political parties are rattling loudly, demanding that Scottish taxpayers with higher earnings should face increased income tax.

High earners tend to be the more mobile members of society. While the mere threat of a penny or two on income tax might not persuade them to up sticks and move south, some of those who have reason to move house anyway might be tempted to leave Scotland if, in doing so, they minimise the risk of a threefold increase in land tax – particularly at a time when their resources might be over-stretched.

Given the copycat antics of both governments, it is unclear whether Holyrood genuinely wants emigrants to be treated so much more favourably than immigrants, or whether the latest volley from Westminster has still to be returned.

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


Image of Donald Drysdale, Author

Donald Drysdale of Taxing Words Ltd is a freelance author and winner of Tax Commentator of the Year in Tolley's Taxation Awards 2017. He also writes for ICAS, Bloomsbury Professional and other publishers, having previously held senior positions in tax and technology at KPMG, PwC and ICAS.


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