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New Land Transaction Tax in Scotland

Stamp duty is to be replaced with a new property tax in Scotland and if you're buying property in Scotland, you need to know about it.

Stamp duty is on the way out in Scotland. From 1 April 2015, Stamp duty will be replaced by a new tax, the Land and Buildings Transaction Tax. It's one of the first taxes raised by the Scottish government and will affect you if you purchase property in Scotland.

Currently, Stamp Duty Land Tax (SDLT) is payable when you buy property in the UK. This tax has been criticised because it is charged on what is commonly known as a ‘slab system’. This means that if the purchase price of the property is over an SDLT threshold, then the highest level of SDLT is charged on the whole of the purchase price. For example, the threshold for paying any SDLT is £125,000 and properties over this amount and up to £250,000 are liable to an SDLT rate of 1%. However, if your purchase price is £126,000, you will be charged Stamp Duty of 1% on the whole £126,000 not just the £1000 above the payment threshold: in this case you would be charged £1,260. It is not a progressive tax, like income tax where you only pay the higher rate on the portion of your income above the higher rate threshold.

Critics of SDLT say it is unfair as there are steep climbs in tax for small increases in purchase prices. They also say that the slab system distorts the property market as property prices tend to bunch just below payment thresholds: for example, there will be a cluster of properties just below £125,000 and just below £250,000.

The new Land and Buildings Transaction Tax

All this will soon change in Scotland. SDLT will be scrapped in April 2015 and replaced by a new tax: the Land and Buildings Transaction Tax (LBTT). This will apply to the sale or lease of land in Scotland. The big change is that LBTT will no longer be charged on the slab system where the whole price is taxed at the same rate. With LBTT, slices of the price will be charged at different rates. As with income tax, you will only be charged at the higher rate on the portion of the purchase price above threshold. The new rates were announced on 9 October 2014, but are subject to Scottish Parliamentary approval.

The proposed new rates for residential purchases are:

Price                                     Rate

Up to £135,000                       0%

Above £135,000 to £250,000    2%

Above £250,000 to £1m           10%

Above £1m                             12%

What does this mean for you?

Costs

The big change is that your transaction costs of purchasing a residential property will alter. If the proposed rates are passed and if the price of a property is below £324,280 your tax payable on purchase will reduce. If it is above £324,280, you will pay more tax. The Scottish government have provided a quick tax calculator based on the proposed new rates, to enable you to get an idea of what it will mean for your purchase. Though be warned. LBTT is a self-assessed tax and Revenue Scotland does not accept liability for using this calculator.

Timing

LBTT is chargeable on completion. So if you are currently involved in a property deal which will not complete until after April 2015, you will need to take the new tax into account as that is the tax you will be liable to pay. This applies unless you entered into a contract prior to 1 May 2012.

Who and how to pay?

Revenue Scotland is a new body set up to collect devolved taxes in Scotland. You must pay any LBTT before you can register your title with the Keeper of the Registers of Scotland. It is envisaged that this tax will be paid by your solicitor on your behalf as part of the administrative process to complete the conveyancing transaction. But you have the final responsibility for paying the tax.

LBTT will apply wherever the purchaser is based, as long as the actual land is on Scotland.

There are also important changes for commercial purchases and leases and also changes in reliefs available. If you are planning to purchase residential or non-residential property in Scotland it’s worth taking advice to make sure that you’re aware of the changes and how they apply to you.

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