The proposed changes will bring commercial property LBTT rates broadly into line with the rate of stamp duty land tax (SDLT) charged on commercial property in England and Northern Ireland, according to property law expert Alan Cook of Pinsent Masons, the law firm behind Out-Law.com.
The Scottish government intends to retain the £150,000 threshold before LBTT applies. It intends to charge LBTT at 1% on the portion of the transaction between £150,000 and £250,000, and 5% on the portion of the transaction above £250,000. A 2% SDLT rate applies in England and Northern Ireland on the portion of the transaction between £150,000 and £250,000, although the 5% threshold is the same.
The new rates will be introduced on 25 January 2019, subject to approval by the Scottish parliament. The previous rates of 3% on the portion of the transaction between £150,000 and £350,000, and 4.5% on the portion of the transaction above £350,000, will continue to apply to transactions which complete on or after this date where the contract was entered into before 12 December 2018.
Cook said that although the increase in the tax rate applicable to the highest value property band "removes the competitive advantage for higher value Scottish property transactions", Scottish finance secretary Derek Mackay "will be calculating that the broad alignment with the position south of the border will mean that there is no actual disadvantage in Scotland and that this will simply be absorbed as a transactional cost for those buying and selling property in Scotland".
"It is welcome that the Scottish government has confirmed, following its recent consultation process, that it will proceed with the introduction of additional LBTT reliefs for property investment funds, as this has been an area where Scotland has been at a disadvantage to England due to the lack of reliefs equivalent to those in England. The timescale for the introduction of the new reliefs remains uncertain due to Brexit-related complications, but the commitment to move forward with the reliefs is welcome," he said.
The Scottish government proposed the introduction of two new LBTT reliefs aimed at certain types of authorised property investment fund earlier this year. The proposals were prompted by lobbying from the Scottish property and investment management sectors, who had warned that the lack of similar reliefs to those that exist for SDLT could encourage investment and property funds to divest from their Scottish property portfolios.
The budget document confirms the future introduction of the proposed reliefs. These would apply to the 'seeding', or initial transfer, of property assets into a property authorised investment fund (PAIF) or co-ownered authorised contractual scheme (CoACS); and to when units in CoACS are traded. The Scottish government intends to consult on draft legislation next year, "one the nature of the UK's withdrawal from the EU becomes clear".
The Scottish budget also proposes increasing the rate of the additional dwelling supplement (ADS) charged on second or subsequent residential properties from the current 3% to 4%. This proposed increase will also come into force on 25 January 2019, subject to approval by the Scottish parliament; other than for transactions which complete on or after this date where the contract was entered into before 12 December 2018.
Property law expert Rodney Whyte said that the proposed increase "should be looked at in the context of the combined LBTT and ADS taxation cost of buying residential property in Scotland, discouraging geographically flexible purchasers from investing in residential property in Scotland particularly in the higher price brackets".
"The proposed ADS increase is another negative indicator to the marketplace," he said. "Clearly, the Scottish government sees the property market as being again able and willing to absorb additional charges, both in the sense of the proposed uplift to ADS and the increase in top rate LBTT for commercial property transactions."
The Scottish budget document also proposes increasing Scottish landfill tax (SLfT) in line with inflation from 1 April 2019, meaning that the rates will continue to match those charged in other parts of the UK. It proposes increasing the standard rate from £88.95 per tonne to £91.35 per tonne, and the lower rate from £2.80 per tonne to £2.90 per tonne.