In December 2015, John Swinney, Scotland’s Finance Minister, proposed changes to the tax that home buyers in Scotland pay (Land & Buildings Transaction Tax or ‘LBTT’). These changes apply in particular to situations where the property being bought is a ‘second property’ (or indeed third, fourth and so on). These changes are due to take effect from 1 April 2016 so they affect property buyers in Scotland right now. However, the rules do not seem to be widely-known by property buyers and sellers in Scotland. The purpose of this article is to let property buyers and sellers in Scotland know what these changes to LBTT might mean for them and why they need to know and care about these proposed changes right now.
What Are the Proposals?
We wrote about these proposed changes in some detail previously. In simple terms, anybody buying a second (or third or fourth) property that is not a replacement for their main residence will face an additional tax bill equating to 3% of the total purchase price of the new home. It is worth noting here that a property owned outwith the UK, such as a holiday home, would count as an additional property and any subsequent purchases would be subject to the tax.
The proposal is similar to changes made by the UK Government in Westminster and it is mainly aimed at imposing a higher tax bill on buy-to-let investors. Why?
The thinking seems to be that these initiatives will make it harder for investors to build up large portfolios of properties and in turn make things easier for first-time buyers who often find themselves in competition with investors for the same properties when they are looking to get onto the property ladder.
It must be stressed that this article has been prepared with the best information that we are able to gather but that we are not tax advisers, so the best we can do here is to provide our interpretation of what these rules actually mean. If you do have any questions about the potential tax implications of these new LBTT rules for you, we would recommend that you speak to your accountant or financial adviser.
What Will the Effect of LBTT Changes be for Tenants?
When we wrote our original article about these changes, we pointed-out that the size of the proposed, supplemental tax would mean a significant financial cost for investors and that this could have the unintended consequence of landlords increasing rents to cover this cost. We also expressed concerns about how the supplemental tax would be applied in practice.
Unfortunately, having had an opportunity to review the proposed changes in some detail it would appear that, whilst the changes are targeted at investors, they have the potential to leave thousands of regular property buyers facing huge additional costs when purchasing a new home.
Who Does the Supplemental Tax Not Apply to?
The supplemental tax does not apply to First Time Buyers, provided that you do not own or have a share in any other property, for example a property that you have inherited.
A buyer who already owns a property will be exempt from the supplemental tax only if the property that they are purchasing is a replacement for their main residence. The problem lies with how this will be defined in practice. In any event, you will only be considered to be replacing your main residence if your previous home is sold either on the same day as your purchase or during the 18 months prior to your purchase.
Can You Buy a Property Before You Sell?
Whilst most people these days tend to sell first and then buy, in the more buoyant property market that we are currently seeing it is not uncommon to see people choosing to buy first and then sell. By opting to buy first, it can remove the stress of having to find a new home in a very short timeframe before the sale of your existing home completes.
If you plan to buy your new home first and then sell your old property, you will find yourself being hit by the new supplemental tax at the rate of 3% of the purchase price, over and above whatever LBTT you would have paid on the purchase, even if you would otherwise have paid no LBTT on the purchase. For example, if the property is £100,000 and would have been exempt from LBTT, you will now have a £3,000 LBTT bill to pay if you are buying this new property whilst retaining your existing property, even if only in the short term.
You may still be able to claim a repayment of the supplemental tax when you eventually sell your old home, provided that you sell within 18 months of the purchase, but this will still leave many buyers having to foot a bill of several thousand pounds until the repayment comes through. Most of us tend not to have a few thousand pounds lying around for the purposes of giving the Government an interest-free loan, so this clearly has the potential to create issues for a huge number of buyers. And anything that makes life harder for buyers is inevitably bad news for property sellers too.
Can You Renovate a New Property Whilst Staying In Your Existing Home?
At MOV8 we regularly deal with buyers who are looking to buy a home in need of some renovation. They typically plan to buy this new home, spend a number of months upgrading it while continuing to live in their existing home and then sell their old property and move into the new one.
Under the proposed changes these buyers will have to pay the supplemental tax on their new home and will only be able to claim it back several months down the line when they come to sell their existing home. With the new supplement being levied at 3% of the total purchase price, this means that they will be out of pocket to the tune of several thousand pounds that they had probably budgeted for upgrading their new home.
What If There is Only a Couple of Days Between Your Purchase and Subsequent Sale?
According to the proposals, you will still be liable to pay the LBTT supplement on the purchase.
The average selling price of a property in Edinburgh, for example, currently stands at just over £207,000. This means that anyone in the Capital who is planning on buying first and then selling will, on average, be hit with an additional tax bill of over £6,000. That simply is not money that most people have available, even if they know they can claim it back in a few days or weeks.
How Do You Go About Claiming-Back the LBTT Supplement?
The draft legislation says that a repayment can be claimed via an amended LBTT Return if the purchaser is in time to do that: in other words, within 12 months from the submission of the return that was submitted for the original purchase. If the purchaser is outside that window, then the purchaser will need to submit a separate claim to Revenue Scotland. There will be guidance published by Revenue Scotland before 1 April 2016 that will explain what form that claim should take, however at time of writing this is not yet available.
It is also not clear at this stage how long it will take for an application for a repayment to be processed. This means that, at the moment, anybody who plans to buy a property and then sell their home afterwards cannot have any clarity about when they will be able to claim back the 3% tax supplement or indeed get their hands on that money after they have purchased their new home.
Will the Supplement Apply to Portfolio Purchases?
It was recently announced that the Scottish Government will exempt transactions of six or more homes from the LBTT surcharge.
The Scottish Property Federation (SPF) advocated an exemption for larger scale transactions in order to support PRS investors, SME housebuilders, and property entrepreneurs and the Scottish Government accepted this suggestion.
John Swinney, Scotland’s Finance Minister, stated that he recognised the need to balance support for home ownership and first-time buyers without discouraging significant and beneficial investment in residential property for rent.
When Do These Changes Come Into Effect?
As it stands, the proposed changes are due to come into effect from 1 April 2016. Most people we speak to are unaware of these proposed changes and they certainly are not aware of the impact that this could have on regular, non-buy to let landlord, buyers and sellers.
If you are buying or selling a property on the day of writing this article, there is less than 5 weeks until 1 April 2016. With an average of 6 to 8 weeks between the agreement of a sale or purchase and the Date of Entry, most purchases from here-on-in will therefore be subject to these new, proposed LBTT rules.
This leaves almost no time for home movers to adapt or to adjust their plans and it means that we could be looking at a lot of stress for buyers and sellers, along with no small amount of disruption to the property market in the very near future.
Surely the Rules Have Been Finalised?
You might think that if you were introducing a tax with such potentially severe consequences for property buyers in Scotland, the rules would be clear and finalised well in advance of them coming into force.
However, the proposed changes have not yet been finalised. We have spent several days to-ing and fro-ing on the phone with the Scottish Government, following extensive reading and re-reading of the proposals, and even then we cannot be completely certain about what they mean or what effect they will have on property buyers and sellers. So what chance for everyone else?
We hope that the final Bill will be amended to avoid creating difficulties for the scores of buyers whom the additional tax is not actually aimed at: in other words, people who are not buying a property with a view to letting-it out.
So What’s Next?
As ever at MOV8, we will continue to monitor the situation closely so that we can best advise buyers and sellers and to provide updates as soon as they become available.
In the meantime, if you have any questions about this or any other aspect of buying and selling a property in Scotland, please do get in touch with us on 0345 646 0208 or by emailing [email protected] and one of our expert team will be delighted to help.