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Land and Building Transaction Tax – The Elimination of Stamp Duty Land Tax in Scotland

From April 2015, Stamp Duty Land Tax (SDLT) will cease to apply to transactions involving heritable property located in Scotland. Instead, it will be replaced by the Land and Buildings Transaction Tax (LBTT) which is the first devolved Scottish tax and will allow the Scottish Government to have control over the tax base and rates.

It is important to note that the new Land and Buildings Transaction Tax will apply to both residential and commercial property transactions in Scotland. However, for the purposes of this blog, our focus will be on Residential property transactions.

Stamp Duty Land Tax – The Current Situation

Presently, if you purchase a residential property in Scotland you may be liable to pay the Stamp Duty Land Tax. This tax is calculated against the purchase price of the property, otherwise referred to as the ‘Chargeable Consideration’.

The current rates of SDLT are as follows:-

Property Purchase Price Percentage Rate
Up to £125,000 0%
From £125,001 to £250,000 1%
From £250,001 to £500,000 3%
From £500,001 to £1,000,000 4%
From £1,000,001 to £2,000,000 5%
From £2,000,0001 upwards 7%

If you are purchasing a property at £125,001 or above, you will be required to pay SDLT. The SDLT is calculated on the full purchase price of the property. For example, if you purchase a property at £250,000 you will be required to pay 1% of the whole purchase price, being £2,500. If you purchase a property at say £250,010 you will be required to pay 3% of the whole purchase price in SDLT which would be £7,500. This means that you would be paying an additional £5000 in SDLT for a property which costs ten pounds extra.

Stamp Duty Land Tax is often referred to as a ‘slab tax’ in reference to its inflexibility and can have detrimental effect on properties where the purchase price falls just above the lower tax rate.

Land and Buildings Transaction Tax – The Replacement

Unlike its predecessor, The Land and Buildings Transaction Tax will be a progressive tax. Calculated on the same basis as income tax, the purchase price will be divided into segments and each segment will be charged at a different rate. The new Land and Transaction Tax rates are as follows:-

Purchase Price Percentage Rate
Up to £135,000 0%
Between £135,000 – £250,000 2%
Between £250,001 and £1,000,000 10%
£1,000,001 and above 12%

Therefore, if you are purchasing a property up to £135,000 you will not be liable to pay any tax.
If you are purchasing a property between £135,001 and £250,000 you will need to pay a 2% Tax Rate on the portion of the purchase price which falls over the £135,000 tax-free threshold.  For example, if you are purchasing a house at £150,000 you would be required to pay LBTT of 2% on £15,000 (the difference between £150,000 and £135,000).

If you are purchasing a property between £250,001 and £1,000,000 for instance, £300,000 you would be required to pay make a payment of £7,300 (0% of £135,000, 2% of £115,000 and 10% of £50,000) in LBTT.

At first glance, the new LBTT results in lower tax payments than the current SDLT regime for properties purchased up to £324,000. However, any property purchased above this price will see a significant increase in LBTT owed in comparison to what would have been due under the SDLT regime.

The significant increase in tax due on high end properties becomes more apparent when you are purchasing a property at 1,000,000 or above. A property being purchased at £1,500,000 would cost £137,000 in tax, being charged at a rate of 12% under the LBTT whereas it would have previously incurred tax of £75,000 under SDLT.

The Big Change!

Land and Building Transaction Tax will come into force on 1st April 2015. However, whether or not it applies to your purchase will depend on the ‘effective date’ of the transaction. This is the date that the transaction settles, otherwise referred to as the ‘Date of ‘Entry’’. If you have a purchase where the effective date is on or after April 2015 then the new Land and Buildings Transaction Tax will apply to you.

Conclusion

The new tax is meant to ensure that taxpayers pay an amount more proportionate to the value of their property. It is predicted that anyone buying a property up to the value of £325,000 will be ‘no-better or worse off’ as a result of the LBTT.

Revenue Scotland, the body created to administer the LBTT and other devolved taxes, fully endorses the move to LBTT as they believe the previous ‘slab’ system encouraged the bunching of sales within the different SDLT thresholds.

The LBTT regime does however have its critics with accusations rife that the new LBTT has effectively created a Scottish ‘mansion tax’ with properties at the higher end of the market susceptible to increased taxation.  There is concern that these changes can only have a negative impact on the demand for high end properties. However, only time will tell the true effect that the Land and Buildings Transaction Tax will have on the Scottish property market.

For more information or advice on buying a property in Scotland and on Land and Building Transaction Tax, please complete our online enquiry form or call us on 0141 221 1919.