The Scottish Government has hoped to raise £235 million but the published figures show it was £201 million, some £34 million below expected and 26% below the £270 million collected the year before.
However this fall is likely to have been exacerbated by property market activity brought forward at the end of 2014/2015 as buyers raced to beat the new LBTT when it was introduced in April 2015.
LBTT replaced stamp duty on all residential purchases in Scotland and the new rates make it more expensive to purchase property with a value above £333,000 compared to the rest of England and Wales. This is especially the case in the prime market where costs are as much as 90% higher than under the previous system.
‘While the introduction of LBTT in April 2015 resulted in a welcome reduction in purchase costs for a significant number of home buyers in Scotland, the flipside of this was a substantial increase in taxes for those at the top end of the market,’ said Oliver Knight, a senior analyst with Knight Frank Residential Research.
‘Last year, we raised concerns that levying these rates for higher value homes could reduce transaction volumes and ultimately have a negative impact on tax receipts. Policymakers may need to consider allowing some room for manoeuvre on LBTT rates if they find that they continue to impact on activity at this end of the market, and if they want to hit next year’s forecast of £295 million in revenue,’ he added.
He explained that one reason for the shortfall in forecast versus actual revenue in 2015/2016 has been the effect of forestalling whereby some transactions were completed earlier than they otherwise would have been to ensure they were assessed under the old SDLT regime.
The latest available data from the Registers of Scotland shows that 62% of all residential sales above £1 million in Scotland in 2015 occurred in the first three months of the year, prior to the introduction of the levy.
However the amount for commercial property was higher than expected. The Scottish Government had expected to raise £146 million on non-residential property but actually raised £214.2 million, some £68.2 million more than predicted.
Blair Stewart, partner in Strutt & Parker's Edinburgh office, pointed out that the LBTT residential shortfall was significant and highlights a weakness in relying on too narrow a band of high value sales.
‘While the commercial LBTT tax revenues came to the rescue this year, the forecast for the next five years is steadily more dependent on high value sales. Equally, the end of the year was distorted because significant numbers of people were buying properties before the LBTT surcharge kicked in. This will not be the case in future years,’ he said.
‘While the whole housing market is improving in terms of sales volumes the behavioural impact of LBTT on the upper end is still playing out. The average value of a house in Edinburgh dropped 15.4% in February compared to February 2015. This is not indicative of a price crash now but it is illustrative of how much the market has been distorted by LBTT,’ he explained.
He said it was interesting that in February the year to date sales volumes in all three of the firm’s Edinburgh markets of £350,000 to £750,000, £750,000 to £1 million and £1 million plus were either up or level pegging with February 2015, despite the sales rush at the start of last year and despite the February to February 15% drop in average price.
‘We consider this is largely due to buyers forestalling and investing in buy to let properties and second homes before the LBTT supplement on additional properties kicked in on 01 April. However, it also shows a strong performance in the market in the first months of 2016, added Stewart.
According to Faisal Choudhry, director of Scottish research at estate agent Savills, the problem is that the revenue raised at the lower end of the market is not making up for the shortfall at the top end of the market.
‘The bulk of activity in Scotland takes place below the rate of LBTT, so the amount of additional revenue it will raise is zero. It will take some sort of tax rise or adjustment of the rates before this gap is closed,’ he said.
