As winter draws in and the housing market prepares for its seasonal hibernation, it seems an appropriate time to take stock of one of the most significant changes that occurred in the Scottish housing market during 2015 – the introduction of Land and Buildings Transaction Tax (LBTT). Having covered LBTT more generally earlier in the year, we are going to focus in this Briefing on two of the main issues, firstly, the contentious issue of forestalling and revenue receipts, and secondly how the market has reacted since April 1st.

Revenue Receipts Are Down

Overall, including commercial transactions, Stamp Duty took in £639m in revenue for the Scottish Government in 2013/14. To place this in context, Inheritance Tax receipts were £240m and combined Alcohol and Tobacco Duties £2,218m.

The amount contributed purely by residential transactions in 2014/15 for Scotland was £270m, however, this amount has fluctuated dramatically in recent years, being dependent on housing market performance. Although revenue has doubled in 2014/15 since the market’s lowest point in 2009/10, it remains over 20% down on the revenue collected in 2007/08.

Considering each price bracket in turn, the mass market (under £250k) saw the most severe downturn in the years immediately after the peak. First time buyers (FTBs) and second movers, who had not enjoyed the capital gains of those who had been longer in the market, were locked out as mortgage availability and economic confidence collapsed. However, the return of higher levels of mortgage lending and Government schemes such as Help to Buy (HtB) led to consistent year-on-year growth from 2011/12 to 2014/15. However, revenue figures for 2014/15 still remain 38% down on peak levels for this part of the market.

Moving up the market, the £250k to £500k bracket remained more hesitant, not benefitting from market incentives but suffering from the economic context and limited supply. For this market it was only more recently, in 2013/14, that increased economic confidence, rising sales and house price growth saw revenue return to 84% of peak levels, after remaining fairly stagnant from 2010 to 2013.

SDLT revenue by year chart one

The revenue received from the upper end of the market has been steadier until recently when there was a notable annual jump of 56% from £40m to £70m from 2013/14 to 2014/5. The top end of the market currently accounts for approximately 25% of all revenue.

Forestalling Has Had A Big Impact

A key result of the introduction of LBTT, both politically and for the market, has been the behavioural change that was triggered by the announcement of higher tax rates at the upper end of the market. With tax liabilities on transactions increasing sharply above £330k from the previous Stamp Duty regime, many potential sellers brought forward their decisions to beat the change. As we anticipated, this saw the number of higher value properties coming to the market early in the year dramatically increase, then retreat after April 1st.

With Stamp Duty being a significant income stream for the Government, this change in behaviour has impacted on the expected revenue forecasts.

In the latest (July 2015) ‘Devolved taxes forecast’ by the Office for Budget Responsibility (OBR) they acknowledge that, “these behavioural responses reduce the LBTT Forecast by £20m in 2015/16 with the effect concentrated in the earlier months of the year.”

SDLT revenue by year chart

The average tax bill per transaction is also revealing of this behavioural change. In 2014/15, under Stamp Duty, 94,650 transactions occurred yielding £270m in tax receipts; this gave an average tax bill of £2,853, up 18% on the 2013/14 figures. In April 2015, under LBTT, the Government received £7m in receipts over 6,880 transactions returning an average of £1,017, just over half the average of the previous April at £2,332 and £11m lower in total tax receipt. As the year has progressed, this average figure has begun to return towards previous year’s averages, but has been a slow adjustment and is likely to be greater than the £20m reduction forecast by the OBR.

There Has Been A Noticeable Shift In The Tax Burden

According to a SPICe briefing for the Scottish Parliament, published here to coincide with the introduction of LBTT, the Scottish Government forecasts a 5% average increase in LBTT revenue across all local authority areas, based on 2014 data. As would be expected, the highest percentage change falls to areas with the highest house prices; Edinburgh, Aberdeen and the commuter belt of Glasgow, which will be paying one-quarter to one-third more as a result of the move to LBTT. While the average change by local authority is 5%, based on these figures, the total tax take was forecast to increase by just under £30m, or 18% between SDLT and LBTT.

Using individual transaction data for 2015, we can analyse the comparative tax burden on specific areas under LBTT compared to SDLT in more detail. This shift in revenue profile has clearly had an impact on certain geographies and house types more than others. The largest increase in tax bills has fallen on AB15 in Aberdeen, then Edinburgh’s New Town and western family suburbs, followed by Bearsden, Newton Mearns and Glasgow’s West End, with North Berwick in East Lothian completing the top 10. In these postcodes, the average property duty charge has increased by about 50%. If we take some local areas, such as Edinburgh’s New Town, based on transactions registered from April to August 2015, then the 223 transactions would have incurred an average LBTT bill of £18k, up from £12k under SDLT, with 31 transactions seeing their average tax bill increase from £25k to £43k.

Is The Market Returning?

The question that has been most prevalent over the course of the year has been whether this behavioural change will have a lasting effect or if the market will adapt to the new cost of transacting in time.

Using listings data, which is a strong and timely indicator of market intent compared to recorded sale, which have a lag to the market, we can see how the market has been changing in recent months.

Comparing the market over £250k in Edinburgh with the same month a year before, the graph below shows the change in the number of properties listed by price bracket. This shows the strong spike, then retreat in higher value properties from the start of the year. However, what is notable has been the recent change in listings over the late summer/autumn. In August, we can see the overall listing pattern turned positive for the first time since March, with this pattern consolidating across all price points into September.

While this pattern is potentially reassuring from a market health point of view, there may be other factors that could be contributing to a late market bounce. September and October are traditionally strong transactional months prior to the market cooling in the run-up to Christmas. It is also a time where both buyers and sellers can be more motivated, realising that if they do not transact before Winter arrives, then reduced demand may delay them moving to the following Spring. This factor can lead to compromises being made to secure a transaction before Winter.

For example, we have seen some parties electing to split the difference in cost to accommodate both the seller’s value expectations and the buyer’s desires to secure the property. While this is not commonplace, nor do we expect it to be a persisting trend, the time of year, combined with market frontloading and adapting expectations may all be contributing to this recent pattern of activity.

SDLT revenue by year chart

Future Outlook

The forecasts for LBTT tax receipts by the Scottish Government in their Draft Budget from October 2014 for 2015/16 was £295m. This varies from the OBR forecast from July 2015, which was £31m lower at £264m. The OBR also goes on to forecast receipts for the next 5 years.

SDLT revenue by year chart

The OBR predicts higher tax receipt growth than the rest of the UK in Scotland as the steeper rise in the effective rate in Scotland under LBTT is expected to raise more revenue as house prices and transaction increases. However, this bears careful watching, especially given that more of the revenue now from property tax in Scotland is based on a reduced number of sales (around 75% of the revenue from just 8% of the sales). Any slowdown, especially at the higher ends of the market, could leave the Government with a sizeable gap to fill.

So looking ahead, what does LBTT have in-store for the market? It seems now that, as the year has progressed, that the market has adapted slowly to the new circumstances and this trend is likely to continue. That said, anecdotally, some sellers who might have been considering upscaling are now looking towards extensions and attic conversions to gain more space, which can often be comparable in terms of cost as the LBTT liability from selling. This reality is likely to remain a consideration moving forward.

In the longer term, as house prices increase, the number of properties falling within the higher rate is also going to rise especially in core economic areas such as Edinburgh, Aberdeen or Glasgow. As noted by the OBR forecast, this is expected to increase the revenue difference in the longer term from the revenue neutral launch position against SDLT.

Moving forward, the Scottish Parliament has invited evidence on LBTT to inform the 2016/17 Budget. There have been some responses that have questioned the current banding, suggesting too much burden has been placed on the mid to high values. This burden, it is suggested, will potentially constrain operations in this section of the market, in turn impacting on the aspirations and functioning at lower levels of the market. With market operations not yet stabilised, whether this impact will fully develop is yet to be seen. There needs to be a balance between getting rates correct, fair and operational on one hand and, on the other, ongoing fiddling, which will continue to create uncertainty and distortions in the market.