The Scottish ministers should now be considering options to maintain and stimulate transactional activity, ensuring that LBTT revenues continue to make a substantial contribution to Scotland's finances during a time of significant uncertainty.
Revenue from LBTT, which replaced stamp duty land tax (SDLT) in Scotland on 1 April 2015, rose by 12.8% in the last financial year, to £546 million, up around £40 million on budget and assisted by a buoyant Edinburgh market. The figures came as a surprise to those that predicted that the Scottish government's approach to an SDLT replacement would fail, given the differences in tax treatment at the higher end of the market between Scotland under the new tax, and England.
However, market soundings now indicate that prospective house purchasers are beginning to hold off on making reservations or committing to purchase new homes as Brexit approaches. While there is no sense of crisis, the rate of reservations of new-build homes is beginning to slow, with Brexit the most logical explanation.
In September Bank of England governor Mark Carney predicted a disorderly exit from the EU could have a crushing effect on house prices, which he forecast could fall as much as 35% over a three-year period. Cautious house buyers may be tempted to wait to see if this comes to pass and cash in at the bottom of the market - but such a hiatus would be disastrous on many fronts, discouraging investment in much-needed housebuilding programmes as well as depriving the Scottish government of a source of revenue.
In this scenario, we have to acknowledge that LBTT rates at the higher end of the Scottish market are far higher than those at the top end of the English market. For example, buying a property in Scotland in the £325,000-£725,000 price bracket will attract LBTT at a rate of 10% and any property over £750,000 a hefty 12% of value. In England, the SDLT equivalent on a property valued between £250,000 and £925,000 is only 5%, doubling to 10% for purchases between £925,000 and £1.5m and 12% on any home valued at more than £1.5m.
Certainly, the higher tax rates in Scotland are not helpful in encouraging people to buy in Scotland and there is little doubt they act as a disincentive to inward investment. So now may be the time for the Scottish government to soften their stance regarding the higher rate bands, and to offer a Brexit-related LBTT holiday covering the period leading up to and post-Brexit.
A relaxation on LBTT and a re-adjustment of rate bands would create a stimulus, particularly at the upper end of the market which generates a disproportionate slice of LBTT revenue, and which is typically composed of discretionary buyers who don't need to buy and who have other options such as upgrading or extending their existing accommodation. It would also create a degree of equal comparison with the English market.
I wouldn't necessarily argue that any decision to amend the rates should at this stage be permanent, but could simply be for a defined period which encourages continued transactional activity during a time of economic uncertainty. If revenue numbers were not adversely affected by such a 'holiday', the government could then consider whether to extend the policy and level the playing field with England.
The Scottish government has been innovative in helping aspiring home owners take their first steps onto the property ladder. Now is the time to continue to be bold, to continue to innovate and to demonstrate forward thinking so that transaction levels, and therefore LBTT receipts at the higher end of the housing market, are maintained despite the gathering clouds of Brexit.
Rodney Whyte is a property law expert at Pinsent Masons, the law firm behind Out-Law.com.