Property taxes: Scotland’s approach risks killing golden goose
Last week the Institute for Fiscal Studies (IFS) published a report on the impact that higher rates of personal taxation have had on the Scottish economy and the levels of revenue raised. Their conclusion was that far from raising more money, the higher rates of taxation may have actually reduced the amounts raised.
The report stated that the highest rates may be resulting in more tax avoidance, greater migration, and increased behavioural changes to avoid the greater levy. So, higher rates of tax are often sold on the basis that if we increase by 1 per cent and there are X number of people earning this level of income then revenues will increase proportionately. This, of course, implies that people being taxed will simply sit back and accept the situation, but this is rarely the case.
A similar policy is in place in relation to property taxes although ironically this one is paying dividends due to the current buoyant housing market in Scotland. The latest official statistics for Land and Buildings Transaction Tax (LBTT) revealed that £655.3m was raised in the 12 months to October 2024.
This is £56.3m higher than the previous 12 months in 2022/23, when £599.0m was raised. The figure for October alone was £71.2m, which is £11.4m higher than September and the second largest monthly figure recorded since data began being collected in April 2015.
Almost all the residential taxes raised arose from properties which sold for more than £325,001. This means that the average tax levied per transaction was £21,622 which, by any standards, is a large chunk of money on hard-pressed homebuyers.
With Scottish homebuyers now contributing just under two-thirds of a billion pounds in property taxes annually there is clearly justification in asking if this is fair. The 10 per cent property tax begins at £325,001 in Scotland compared to £925,001 in England, resulting in Scots being charged substantially more at a lower threshold than our English counterparts.
Yet those earning an annual income of £28,000 and living in a property worth just over £325,000 are defined as the Scots with the broadest shoulders. It is highly unlikely that these people will believe they are wealthy. This is the income and homes of people with all sorts of jobs from plumbers, chefs, sales managers, senior drivers, to administrators. An even higher tax band impacts upon nurses, teachers, and police officers.
Property taxes – whether it is LBTT in Scotland or Stamp Duty Land Tax (SDLT) in England – are a big earner for governments. But there is undoubtedly an argument for a level playing field between Scotland and the rest of the country. Just as the impact of higher income taxes may actually be reducing overall revenue it is not inconceivable that higher LBTT rates will ultimately result in lower returns. The long-term impact on the Scottish economy of such higher taxes on homes and employment is difficult to determine but it is unlikely to be positive over the next five to ten years.
If higher property and income taxes start to deter individuals and companies from future investments in Scotland, then far from being seen as progressive taxation it will be regarded as enormously regressive.
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