Call for Evidence on LBTT supplement in ScotlandMake Text Bigger
Scottish Government is calling for Evidence in relation to its proposal to impose a 3% Land and Buildings Transaction Tax (LBTT) levy on buy to let and second home purchases. Here is a link to the information on the Scottish Government website.
The deadline for evidence is Friday 29 January. Responses should be sent electronically in word format to:
I have responded as follows:
Proposed LBTT supplement on additional residential homes : Call for Evidence
I wish the Committee to have regard to my comments on the proposed LBTT supplement on additional residential homes.
My first point is a general one. The Scottish Government should be congratulated on having a more balanced housing policy than the Westminster Government, who have an unhealthy obsession with encouraging home ownership. For example, it is helpful that the Scottish Government has no plans to allow RSL tenants to buy at a large discount and that there are no plans to change the definition of affordable housing. Furthermore, the decision to cease the sale of council homes from 1 August 2016 will help reverse the decline in the supply in social rented housing.
That said, it is disappointing that the Scottish Government intends to follow the Westminster Government’s lead and impose a 3% levy on buy to let and second homes from 1 April 2016. Furnished holiday lets contribute to tourism and the Scottish economy. The 3% levy will have an adverse impact on the sector.
In terms of the buy to let sector, this sector is already being badly affected by Westminster tax changes.
Clause 24 restricts finance cost relief for individual landlords and was proposed by George Osborne in his Summer Budget on 8 July 2015.
Landlords are currently able to offset all their finance interest against their rental income, before calculating their rent profits and therefore their tax bill. This is quite normal in business as the general taxation principle is that tax is applied on profit.
The Government proposes to break this normal taxation practice and require landlords to pay tax on part of their turnover. By the year 2021, it will still be possible to get a deduction for finance interest, but the amount will be capped at 20%. This is a very significant change because in most cases, finance costs will be the landlord’s largest cost. No other business is taxed in this way. No other business is taxed on interest on loans taken out to buy assets that generate taxable income.
There is high demand for private sector rented accommodation in Scotland. The sector plugs the gap for those who can’t afford to buy (or choose not to buy) and for those who are not able to access social housing. It is likely that the supply of private rented housing will diminish as a direct result of Westminster’s Clause 24.
The Clause 24 tax change has very serious consequences for the private rented sector. Some landlords could face a tax bill even if their buy to let property makes a loss; some could pay tax in excess of 100% of their actual rental profit; many lower rate tax payers will move into the higher rate tax bracket as a result of the change. Existing sustainable rental businesses will become unsustainable over the next few years.
The knock on consequences for the housing market are alarming. Some landlords are already passing on costs by raising rents; others are considering selling properties to reduce debt and risk. Unfortunately, some tenants will be evicted and could be made homeless.
It is disappointing that Scottish Government is rushing through legislation without full and proper consultation. Whilst there is a ‘Call for Evidence’, there is no detail for people to comment on unlike the position in England, Wales and Northern Ireland where a detailed consultation document has been published by HM Treasury setting out how the Higher Rates of Stamp Duty (SDLT) on purchases of additional residential properties could be implemented.
The Westminster and Scottish Governments both wish to increase housing supply. However, the policies on higher rates of SDLT and LBTT will be a disincentive to investment in housing and will have a negative impact on housing supply.
In the Call for Evidence paper the Scottish Government is asking what the likely impact of forestalling would be. My view is that this would be beneficial as it would allow the impact of other legislative changes to be monitored and the affects assessed. The introduction of the 3% LBTT may prove to be not necessary to encourage home ownership and/or undesirable because of the adverse consequences which would result.
The private rented sector is facing enormous change with new tenancy legislation being introduced, new compliance requirements and punitive taxation measures being imposed from Westminster. There is a risk that the private rented sector will become unstable as a consequence of the cumulative impact of change and thousands of landlords will exit the sector. This will be bad for tenants who will face eviction and be made homeless.
In the absence of a detailed consultation paper from Scottish Government, I have based the remainder of my comments on the Westminster Government’s consultation on Higher Rates of Stamp Duty Land Tax on the basis that the Scottish Government is likely to be considering implementing the LBTT changes in a similar way.
In my view, a 3% LBTT levy should not be imposed on all joint purchases. In particular, where a parent is helping a child get on the housing ladder by purchasing jointly, I believe such transactions should be exempt from the higher rates of LBTT. Such transactions assist first time buyers and should be encouraged, not discouraged (see question 2 of SDLT consultation).
The 3% LBTT levy should not apply to all furnished holiday lets as these type of properties make an important contribution to local economies. My proposal is that the sale of an existing furnished holiday to a purchaser who continues to use the property as a furnished holiday let should not attract the higher rates of LBTT. My reasoning for this is because the transaction does not reduce the supply of owner occupied houses (see question 11 of SDLT consultation).
In relation to question 12 of the SDLT consultation, I have a number of proposals for the Scottish Government to consider.
- Firstly, if a property is not suitable for mortgage purposes, the purchase of such properties should not attract the higher rates of LBTT as such properties are unlikely to appeal to first time buyers. Such properties are usually targeted by property trading companies or by buy to let investors who have the experience and financial resources to bring the properties back into use. This type of investment in housing should be encouraged, not discouraged by higher rates of LBTT.
- Secondly, if a property has been on the market for 6 months or more, the purchase of the property as an additional purchase should be exempt from the higher rates of LBTT. In such cases, first time buyers have had ample opportunity to make an offer. If there is only interest in a property from property trading companies and/or buy to let investors, it is in the interests of the seller to get a sale. Applying the higher LBTT rates in such circumstances, could result in the sale not concluding. It is better to have churn in the housing market, than have properties remaining unsold for long periods.
- Thirdly, the current proposal disadvantages existing landlords who may wish to restructure their portfolios. This is because selling to a company would attract higher rates of LBTT. I propose that if a property is owned by an individual in their own name and the property is being purchased by a company owned by that same individual, such transactions should be exempt from the higher rates of LBTT because such transactions will not reduce the supply of owner occupied houses.
- Fourthly, I wish to propose that if a property is already a buy to let property, the sale of the property to a buy to let investor should be exempt from the higher rates of LBTT because such transactions will not reduce the supply of owner occupied houses. In particular, HMO properties being sold to another landlord should be exempt as these types of properties are not suitable for first time buyers.
- Fifthly, it appears that the Westminster Government has not considered the impact on property trading companies. Such companies buy derelict and run down properties, refurbish and improve them and then sell them for a profit. Sometimes these sales will be to first time buyers. Such activity should be encouraged as it brings empty homes back in to use and improves the quality of the housing stock. Applying the higher rates of LBTT to such activity will be a disincentive and will reduce investment in housing at a time when the Scottish Government has acknowledged that there is a need to increase supply.
My overall impression of the consultation published by the Westminster Government is that it seeks to favour large scale investors over small scale investors. I believe that the Scottish Government should not follow Westminster’s lead. I believe that the Scottish Government’s overall aim of accelerating housing supply would be better achieved if it also incentivised small scale investors to invest in housing. The cumulative contribution from small scale property businesses to housing supply should be acknowledged by Scottish Government and encouraged.
In relation to question 13 of the SDLT consultation, I believe that an exemption should be available to individual investors with an existing residential property portfolio of at least 15 properties at the time of a transaction. This would recognise the contribution that such individual investors make as housing providers to the thousands of people who choose to, or must, rent privately. Non-natural persons with at least 15 properties at the time of a transaction should also be exempt as should the bulk purchase of at least 15 residential properties. These exemptions will help accelerate housing supply.
To conclude, I believe that the Scottish Government should not follow Westminster’s lead on a 3% levy on buy to let and second home purchases and should delay consideration of the issue until the impact of other legislative changes that will impact on the private rented sector are understood.
If the Scottish Government decides to proceed and introduce legislation which will become effective from 1 April 2016, the exemptions I have proposed should be included in the legislation to lessen the adverse consequences of the tax change.
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