Holyrood has little wiggle room with the land and buildings transaction tax

A copy of this article first appeared in the 'Thunderer' column of the Scottish edition of The Times newspaper (and online) on Friday 14 July 2017. 

The brave new world of tax devolution promised a distinctive tax system attuned to Scotland’s interests and priorities.

However, the admission last month from Derek Mackay, the finance minister, that the Scottish government may consider reforming its land and buildings transaction tax (LBTT) showed the pitfalls of having control over a relatively modest part of the tax regime.

Respondents to the latest Royal Institution of Chartered Surveyors’ residential market survey identified the tax as a factor in the recent market slowdown, so where does this leave ministers before next year’s budget? Mr Mackay hinted at lowering LBTT for homes in the £325,001 to £500,000 bracket from  10 per cent to 5 per cent. It would be the latest in a series of amendments since the tax was unveiled in 2014.

These changes shouldn’t be seen as a one-way street. The Scottish government’s decision to scrap the previous system prompted George Osborne, who was then the chancellor, to follow suit. Any new move would also be viewed as a tacit response to accusations that the regime is stifling the market.

Property experts argue that reform would reinvigorate the housing market and increase tax receipts. It would also bring more Scottish buyers into line with their peers south of the border, where the 5 per cent rate extends to a more generous £925,000, compared with the present upper limit of £325,000 in Scotland.

However, such a change could threaten the very foundations on which LBTT was designed. So would ministers move to offset a more generous 5 per cent tax bracket with higher rates at the very top? Or would we see a restructuring across the whole gamut?

All this serves as a reminder of the impact that UK tax policy continues to have on devolved taxes — that tax competition can apply within states as well as between them, and can work both ways. This isn’t unique to LBTT. With the range of devolved powers, the tendency so far has been towards the status quo as opposed to substantive, radical reform.

In defence of ministers, it is hard to upset the apple cart when the majority of tax decisions remain outside of their control. As the Scottish government prepares for next year’s budget, it should ensure that its priorities for the tax system retain a distinctive feel.

By John Cullinane, Tax Policy Director, Chartered Institute of Taxation