Scottish Budget 2025 to 2026: Scottish tax ready reckoners

Land and Buildings Transaction Tax

Land and Buildings Transaction Tax (LBTT) is a fully devolved tax which came into effect from 1 April 2015. It applies to residential and non-residential land and buildings transactions (including commercial leases) where a chargeable interest is acquired.

The tax applies a progressive rates and bands structure, with the marginal tax rate increasing as the value of the transaction increases. The current rates and bands for residential and non- residential LBTT conveyances are set out in Tables 3 and 4 below.^[10]

For certain transactions, the Additional Dwelling Supplement may also apply at a flat 8% rate.

The Scottish Government has full powers to vary rates, bands, reliefs and any other elements of tax policy.

*For first-time buyers the nil rate band ceiling is £175,000 due to the availability of a relief.

Table 1 illustrates the estimated revenue gains and losses when these marginal LBTT tax rates are increased, or decreased, in isolation for each tax band.

The cumulative revenue impact of changing the tax rate in all bands by one percentage point is not equal to the sum of changing the tax rate in each tax band by one percentage point due to the way in which behavioural elasticities are calculated. However, for small changes in tax rates, summing the impacts of changes in individual tax bands will give a reasonable approximation of the overall tax impact.

For an increase in the ADS rate, we make assumptions about the extent to which the “main” residential market is in a position to absorb any transactions which do not proceed. Consistent with judgements made by the SFC, we assume that 50% of transactions “lost” due to the ADS increase will be absorbed by home movers or First-time buyers in the first full year of this policy.

Although the impact of changes to residential LBTT rates and to the ADS are presented in isolation, changes to one element can have impacts on the other. As noted above, an increase in the ADS rate is assumed, through the behavioural effect, to have an impact on residential LBTT revenue. This includes both any loss of residential LBTT revenue from ADS transactions which do not proceed, or are postponed, as well as any revenue recouped by absorbing some of the “lost” ADS transactions. There is also a relationship between ‘core’ LBTT revenue and changes to the ADS rate which is also factored into the ready reckoner.

Annual estimates of the impact of a change to the ADS rate on revenue are complicated by the need to consider the potential for repayments to occur during later years. For example, although an increase in the ADS rate in 2025-26 would result in relevant transactions paying the higher ADS rate in that year, some repayments claimed in 2025-26 would relate to transactions from previous years that were paid at a lower rate. Without an adjustment to take account of this, the estimated revenue impact for 2025-26 would tend to overstate the long-run position, in which payments and repayments would be based on the same rate. The reverse would be true for a reduction in the ADS rate. To avoid this, the estimated revenue impact presented in Table 1 is based on the change in revenue from those transactions where no claim for repayment is expected to be made.

Areas of uncertainty

Some key types of uncertainty which affect costings of changes to property transaction taxes are set out below.

• Forecasts involving the residential or the non-residential property markets involve estimating the path of both transactions and property market prices. These are inherently difficult to predict as they are influenced by many factors, including: the cost of borrowing; cost of construction materials; earnings and employment; and wider economic growth.
• For any transaction tax (such as LBTT), forecasting the number of land and buildings transactions is complex as households and businesses generally have more discretion about when to purchase long-term assets such as property than they do about other types of more day-to-day spending. Since a relatively small share of higher-value residential, and particularly non-residential, transactions account for a large share of revenue, uncertainty around transaction levels at the top end of the market can have a significant impact on revenues.
• As a result, when taxes change there will be an associated behavioural change (transactions may be initiated, postponed or cancelled). Measuring the extent of these behavioural changes relies on accurately predicting the tax elasticities (the responsiveness) associated with that change. Data from which such elasticities can be derived is often limited and/or dated and/or not specific to Scotland, and the policy costings therefore relies on judgement from the SFC on which elasticities to use. We have replicated the SFC’s elasticities and approach to behaviour in our costings.