The Residential Property team at Morton Fraser has been hot on the case, comparing the old and new SDLT rates to see how savings apply to our clients’ purchases. For some, the old and new values differ greatly, while for others, they level out due to the different nature of the old and new tax systems.
However, the changes don’t begin and end with George Osborne’s reforms. In Scotland, John Swinney’s Land and Buildings Transaction Tax (LBTT) will replace SDLT from April 2015. Comparing the new SDLT rates against the proposed LBTT rates produces an interesting picture. In Scotland, any buyer of a residential property over approximately £255,000 will pay more tax under LBTT when comparing the proposed rates against the new SDLT ones.
Statistics from the Registers of Scotland give the average sale price for a home in Scotland as being in the region of £170,000. The latest ESPC figures show, however, that the average price in their postcode areas sits at around £217,000 and that, on average, only approximately 15% of properties sell over the £330,000 mark in East Central Scotland.
It is decision time for the Scottish Government with the proposed LBTT rates awaiting ratification and media coverage and market interest building. The key question for house buyers is whether the Scottish Government will stick with the proposed rates or whether they will make adjustments. Let’s assume they stick with their initial figures for now. What are the implications for house buyers at different levels of purchase? Should they drive through their transactions before April 2015 or hold off?
Under both schemes there is still no tax under £125,000, so there will be no real effect on the market at that level. In the £125,000–£135,000 band, SDLT is due but purchases will be exempt from LBTT. In reality, however, the nominal savings made here are unlikely to make a huge difference to sales. Thereafter, up to around £255,000, you can make a saving of £200 if you wait until LBTT is introduced. Accordingly, I don’t see this slowing the market in the short term.
Moving on up
As we move up the ladder, things get slightly more complicated. As mentioned, the majority of properties in Scotland will see no change or potentially benefit under the proposed LBTT scheme. However, beyond the £255,000 mark, purchases will carry a higher tax bill post-April 2015 under current LBTT proposals. As a result, we may see some panic-buying immediately after the festive period, and indeed we are already speaking to clients keen to put their property on the market. The reason for the rush is that, in most of our transactions, our purchasers have a budget. This fund has to buy the property, pay the tax, and cover all the costs of purchase from legal fees to removal firms. Whilst there may be some flexibility – dreams of upgrading can always be put on hold – what goes on tax can’t contribute towards a new home. After April 2015, with the new tax, the middle to upper portions of the market may flatten for a while as people come to terms with LBTT.
For example, a purchase at £500,000 would give a SDLT bill of £15,000. However, post-April 2015, the LBTT figure will be £27,300 – an additional £12,300 which may not be available and therefore must impact on the ultimate price paid. It is important for clients to note that this is a true extra which will have to come out of your personal funds or savings and isn't included in your mortgage calculation.
For downsizers over the £255,000 mark, there will be a double whammy. The likelihood is that post-April the former family home will achieve a lower sale price, whilst the new home will attract a higher tax bill. We might see some odd repercussions for the property market. We already know that there is a property shortage. If, as we have seen over recent years, the top end stagnates as a result of frustration over achievable sale prices, this could have two key effects. Firstly, it could prevent movement, creating a bottleneck. Would-be movers would then find that they have nowhere to go and so on down the line it would go. Secondly, with the lack of available property, demand eventually would put pressure on supply, and prices would rise.
The investor and buy-to-let
How will these tax reforms affect the buy-to-let market? Confidence, along with stability or growth in the market, is the investor’s friend. The proposed tax changes, the questions raised by the referendum and the uncertainty over “devo max” may seem unsettling to an investor, at least initially. While many investors may take a long-term view, some may be more hesitant, possibly affecting some sectors of the market. In the short term, prior to April, we expect to see some increased activity.
That all said, there are still many properties and developments in Scotland which represent a very good investment for foreign investors, particularly when compared with what is on offer in London in a similar price bracket! The historic university cities in Scotland in particular, are likely to continue to be attractive to foreign investors and we are seeing some hotspots in Scotland which consistently continue to obtain higher yields than the national average.
Moving the goal posts
So, the goal posts have been moved once again, and the effects of this change will play out in the residential property market. Taking all the factors into account, it is envisaged that there could be a gold rush at the start of the year as many, particularly at the top end, complete transactions to take advantage of the new reduced SDLT rates, and beat the new LBTT.
Post-April, the picture looks a bit different and will hugely depend on the ultimate LBTT rates. Assuming they remain as stated, we think that the market below £255,000 will probably not be adversely affected, although we will have to see how the investment market reacts. Above this level, the market will probably take time to adjust. For example, the proposed difference between Scotland and the rest of the UK may influence decision-making for house buyers, at least initially, who are not location-sensitive.
For our clients, remember that property purchase tax has to come out of your savings, not your mortgage – a key factor if you’re also saving for a deposit. But, with the market driven by confidence in conjunction with supply and demand, we can only wait and see how these reforms will play out through 2015 and beyond. If you would like to discuss how the changes in SDLT and LBTT will affect your property transaction, please do get in touch with the Residential Property team.