Scottish Tax - changes for 2023 to 2024: 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 Scottish Government has full powers to vary rates, bands, reliefs and any other elements of tax policy.

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

For certain transactions, the Additional Dwelling Supplement may also apply at a flat 6% rate.

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

Aside from a temporary change to the nil rate band, in place from 15 July 2020 to 31 March 2021 in response to the pandemic, 'core' residential rates and bands have remained unchanged since LBTT was introduced. The non-residential rates and bands for conveyances have been adjusted once, with a change made in 2019 that affected all transactions above £150,000. There is therefore limited experience or data on the impact of policy changes to rates or bands.

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 the ADS tax rate changes in Table 1, the estimated revenue impact is based on the increase, or decrease, applying to the entire value of the relevant chargeable consideration assuming that value lies above £40,000. The estimated revenue impact for changes to the rate of the ADS are calculated for 2025-26 due to the current 18-month ADS repayment period. If it is assumed that the policy is implemented at the start of 2023-24, looking at the revenue impact in the same year would over (under) estimate the longer-run revenue impact because gross ADS receipts will be paid at the higher (lower) ADS rate while a portion of repayments will continue to be made at the previous lower (higher) rate. Therefore, looking at the impact in a fiscal year more than 18 months after the implementation of the change will give a better illustration of the long-run revenue impact. The ADS rate has been increased twice since its introduction in April 2016 – from 3 per cent to 4 per cent in January 2019 and then from 4 per cent to 6 per cent in December 2022

All ready reckoners assume that tax changes are implemented within a short space of time that does not allow for taxpayers to e.g. bring forward transactions in order to avoid a tax increase (behaviour known as 'forestalling').

Areas of uncertainty

There are many general uncertainties to policy costings based on forecasts which involve property transaction taxes.

• 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, e.g. cost of living, labour market, mortgage rates etc.
• For any transaction tax, forecasting the number of transactions is complex as many of the transactions are voluntary, i.e. many people/organisations choose to buy properties. A property transaction tax forecast therefore involves making judgments about consumer behaviour.
• When taxes change there will be an associated behavioural change (transactions may be initiated, postponed or cancelled) and measuring the extent of these things relies on accurately predicting the tax elasticities (the responsiveness) associated with that change. Data is not always available and the policy costing must therefore rely on judgement from the SFC on which standard elasticities to use. Currently, the elasticities used by the SFC draw on evidence from across the UK, where though market characteristics may differ. We have replicated the SFC's elasticities and approach to behaviour in our costings.
• Property markets have largely returned to their pre-Covid activity levels but they have changed considerably both during the early and later phases of the pandemic. Thus, 2023-24 markets follow a period of unprecedented market turbulence and may still be re- adjusting to new parameters. For example, urban, suburban and rural property markets are now different than they once were given different working patterns and consumer tastes.