Scottish tax ready reckoners: direct effects of illustrative tax changes for 2024 to 2025

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 6% 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.

Annual estimates of ADS 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 2024-25 would result in relevant transactions paying the higher ADS rate in that year, some repayments claimed in 2024-25 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 2024-25 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 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 interest rates, earnings and employment, and wider economic growth.
• For any transaction tax, forecasting the number of 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 sometimes limited, and the policy costing 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.
• The property markets had largely stabilised after the significant volatility experienced due to the impacts of the COVID-19 pandemic, and the main source of uncertainty now relates to the cost of living crisis – in particular the impact of future interest rates, as well as trends in overall economic activity and living standards.