Towards the end of last year Scottish Finance Minister John Swinney announced as part of the Scottish budget that second homes, including buy to let, would face an additional 3% levy on top of the Land and Buildings Transaction Tax from April 2016.
However, despite the introduction of the new tax being just months away there remains much confusion amongst landlords as well as buyers and vendors generally.
The intention of the levy is to charge a higher rate on each band of LBTT if at the end of the day of the transaction an individual owns two or more residential properties. However, the higher rate will not be charged if the purchaser is replacing their main residences.
The Scottish Government are keen to ensure that there are sufficient affordable opportunities for first time buyers to enter the property market but the surcharge is a blow to landlords who have also recently suffered the loss of the buy to let tax relief.
George Lorimer, partner at CKD Galbraith, believes that the new levy will undoubtedly lead to a rush of buy to let purchasers looking to beat the April deadline, then to an anticipated drop in sale prices post April with sellers likely to be the ones bearing the lion’s share of the additional costs of the levy.
‘However, given the complete lack of real detail currently available about the new tax, those who do rush to buy or sell property before April are doing so without knowing exactly what the new rules will be. There are many anomalies requiring clarity but the silence from the Scottish Government has been deafening and there is little time left to debate the details of the new tax,’ he said.
‘Specific questions need to be answered on issues such as property owned by married couples and civil partners, second homes outside of the UK and also the logistics of joint purchases, just to name a few. Whilst as a firm we are well placed to advise our clients and those thinking of selling or buying before April, more information is urgently required to allow for informed decisions,’ he explained.
The surcharge is also expected to impact tenants as rents increases to cover costs or less well-off landlords decide to sell rental property.
Bob Cherry, partner at CKD Galbraith, pointed out that the new levy will have implications for current landlords looking to sell as well as act as yet another deterrent to would be landlords thinking about the market as an investment opportunity.
‘This measure, like the LBTT rises introduced earlier this year, is also a wealth tax on owners as buyers of buy to lets will seek to pass on the extra purchase costs by reducing the price they are prepared to pay,’ he said.
‘Landlords’ options have narrowed, however those with a property portfolio might now consider swapping to a limited company structure and paying corporation tax instead. Speaking to an experienced adviser is essential, there is much uncertainty and the new rules are complex,’ he added.
But it is likely to be some time before more details are forthcoming. The Scottish Government has called for evidence in relation to the levy to be sent or emailed by Friday 29 January and all comments will have to be taken into account before the final details are announced.
One particular issue is that the new levy will introduce a tax charge for additional properties below the current LBTT tax threshold of £145,000 and there are concerns that this could make it difficult for new entrants to the market to purchase a main residence.
Property agents are already reporting an increase in enquiries from both existing landlords and those considering investing in property for the first time. Strutt and Parker, said it has seen a rise in people looking to sell their second properties ahead of the tax hike in a bid to ensure it does not affect the price, particularly in Edinburgh and Inverness.
Slater Hogg & Howison reported an increase in areas traditionally associated with rental in Glasgow, either for students or young professionals, such as the West End, Shawlands and Candleriggs.
‘A similar surge was experienced at the beginning of 2015, ahead of the higher rates of taxation that were introduced to the top end of the market from April last year under LBTT.,’ said Faisal Choudhry, head of residential research at Savills.
‘For many people looking to buy a second property, it's a lot of money which could go towards a deposit or work on the property, so people will try to avoid it. After April 01 there is likely to be a lull but the market will adjust,’ he added.
Rettie & Co also believes that property investors considering a second or third property will accelerate their time frame in order to avoid paying the additional tax and the firm has also had calls from people selling their properties who want to get them on the market before the extra tax is introduced as they are concerned that the saleability of their property might be materially reduced.
