Finance and Constitution Committee

Meeting date: Wednesday, January 16, 2019

Official Report 764KB pdf

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Subordinate Legislation

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Land and Buildings Transaction Tax (Tax Rates and Tax Bands etc) (Scotland) Amendment Order 2018 (SSI 2018/372)

The next item of business is consideration of subordinate legislation relating to the land and buildings transaction tax. We are joined by Kate Forbes, the Minister for Public Finance and Digital Economy, and James McLellan, who is head of the fully devolved taxes policy unit in the Scottish Government.

Before we come to the formal consideration of the minister’s motion, we will take evidence on the order. I welcome our witnesses to the meeting and invite Kate Forbes, if she wishes, to make an opening statement.

Thank you, convener. I will just say a few words and then I will be very happy to take questions from the committee.

The order provides for changes to land and buildings transaction tax rates and bands as set out in the budget of 12 December. There are a series of changes to the rates and bands for non-residential LBTT and an increased rate for the additional dwelling supplement. I will take those two aspects in turn.

On non-residential LBTT, the changes will ensure two things. The first is that Scotland will remain a competitive place for those who wish to buy business premises. In two thirds of all non-residential transactions under £350,000, less tax or no tax will be paid, and in all transactions, no more tax will be paid than elsewhere in the United Kingdom. The second thing is that the LBTT will raise vital revenue for Scotland.

The changes to the additional dwelling supplement will raise revenue but, equally important, they will also support first-time buyers and home movers, helping them to compete with buy-to-let investors and those who are buying a second home, which is a particular challenge in rural areas. The rate will increase from 3 per cent to 4 per cent.

On process and timing, the proposals have been made following discussion with Revenue Scotland, and I understand that its evidence makes that clear. In our timing, we have sought to balance the clear risk of forestalling that would have existed if the introduction of the changes had been delayed until 1 April 2019, as per the Scottish Fiscal Commission, and as the committee will appreciate. The timing also allows the Parliament the full 28-day period to scrutinise the legislation, taking the recess into account.

We have also included transitional provisions so that the increased rates will not be paid for any transactions that were concluded prior to 12 December. That is an important principle of fairness.

I look forward to the committee’s questions.

Thank you, minister. We will start with questions from Murdo Fraser.

I remind members of my entry in the register of members’ interests that relates to my property investments.

I want to ask about the increase in the additional dwelling supplement from 3 per cent to 4 per cent. I appreciate that, from the Government’s point of view, it is a revenue-raising measure. The committee has received evidence from a number of interested bodies including the Scottish Property Federation, the Scottish Association of Landlords, ARLA Propertymark and NAEA Propertymark, and they have expressed some concern about the potential impact of the increase on investment in the private rental sector.

They all make similar points, stating that investment in private rented property is less attractive than it was to potential landlords, due not only to the additional dwelling supplement but to a number of other legislative changes at Westminster and Holyrood, including changes to taxation. They argue that, as a result, there is a contraction in the market and a knock-on impact that leads to higher rents, so there is a social impact from making the private rental sector less attractive to investors.

In the light of that, what consideration did the Scottish Government give to those issues when it decided to go for an increase from 3 per cent to 4 per cent? Will you explain to us why the 4 per cent figure was arrived at? Was it plucked from the air? Did it just seem a reasonable increase or was there a more scientific approach to reaching that figure?

There were three questions there, and I will take each in turn. The first was on investments, the second was on rents and the third was on the evidence for the increase of 1 per cent.

On ADS, it is worth bearing in mind that there is another policy objective as well as the ability to raise revenue, which is to support first-time buyers. The SFC’s evidence on that is important. Its analysis shows that the majority of the decline in ADS transactions has been made up of first-time buyers and home movers. In other words, where there is a loss of ADS-related transactions, the majority is absorbed by the market when it comes to first-time buyers and home movers. That is part of the policy objective of the change.

On investment, we recognise the role that the private rented sector plays. In the evidence that has been provided, tax is seen as just one of a range of financial, regulatory and other considerations. The Scottish Property Federation is clear in its evidence to the committee that other changes have more significance than the changes to ADS. The sector remains at a steady 15 per cent in Scotland. Although an increase in ADS might mean that some people in the property sector will take other decisions, other people will see new opportunities.

When it comes to investment, we recognise the role that the private rented sector plays, and when it comes to the creation of affordable housing, people often choose the private rented sector as a form of affordable housing. That is why we have the exemption from ADS for six or more properties, in order to get that balance right.

I move on to rents. It is perhaps obvious, but I think that it is worth saying that the changes have no bearing on landlords with existing properties. They apply only to new purchases. I cannot comment on decisions that individual landlords might take in specific circumstances but, as I said, tax is only one of a range of concerns. The Office for National Statistics has shown a 0.5 per cent annual increase in rents to November 2018 across all private tenants in Scotland. That compares with annual increases of 1 per cent in England and 0.9 per cent in Wales, which suggests that, while ADS has been in place—albeit at 3 per cent—it has not resulted in a significant increase in rents.

On the reason for the increase from 3 per cent to 4 per cent, we were keen to strike the right balance, as highlighted in the question, between supporting the private rented sector and achieving the policy objective of supporting first-time buyers. The SFC evidence makes it clear that we have got the balance just about right because the majority of ADS transactions that are lost will be made up of first-time buyers and home movers. There is an important point about fairness. In the budget process, we looked at different rates, and a judgment was made that a 1 per cent increase would strike the right balance between supporting the sector and supporting first-time buyers.

On the last point that you made about the increase, would it be reasonable for the Scottish Government to monitor the impact on the market? Should the evidence show a detrimental impact on the private rental sector, will the increase be reviewed?

Absolutely. That will definitely be kept under review because of the twin aims of supporting first-time buyers and raising revenue. It is important that, in discussion with the various representatives that have written to the committee with evidence, which I appreciate, we track whether the sector continues to be a solid 15 per cent, track rent increases and, perhaps most important, examine the appetite and demand from first-time buyers and home movers. We have a range of initiatives to support first-time buyers, of which this is one. Our key concern is to ensure that, if someone wants a home in Scotland, they are able to get an affordable home in Scotland.

I have another question on a different but related subject. KPMG makes the point in its submission that the period within which people can claim back ADS if they are inadvertent second home owners is 18 months in Scotland, compared with three years elsewhere in the UK. Given the increase in ADS, KPMG asks whether the Scottish Government is considering increasing the period from 18 months to three years.

I have had cases where constituents have inadvertently been caught in that situation because they have been unable to sell a property and have ended up being hit with ADS, which was never the policy intent. Will the Scottish Government consider that?

11:15  

We recognise that there are concerns about the application of ADS in specific cases. As Murdo Fraser will know—I think he welcomed it at the time—we have legislated for a minor change to make it fairer for people such as a couple who are moving in together, whose previous house was in only one of their names.

Although I am sympathetic to some of the suggested changes, they are significant in scope. There are no plans to undertake a review at this time, but we will shortly consult on a new approach to the planning and management of devolved taxes, which will provide a more structured and efficient means of making some of these changes.

I am mindful of the particular challenge of the period being 36 months in the rest of the UK compared with 18 months in Scotland, but I would argue that that affects only a small minority of cases. In most situations, people have been able to sell properties within the 18 months. Most of those who have indicated a desire to claim back the ADS do so within the 18 months. It is extremely rare for that to prove a challenge.

The minister mentioned fairness as one of the objectives of the Government policy. We are frequently told that fairness is a general goal of the Scottish Government’s tax policy. The problems with the proposals do not relate to the changes that are being proposed today; they go back to the conclusions of the Mirrlees report of 2011, which said that there was no sound case for maintaining what was then stamp duty and recommended that it be abolished.

Notwithstanding the proposed changes, does the Government recognise that LBTT remains a tax that a great many people who are on ordinary incomes and live in typical-value homes will pay several times in their lives but that someone such as the Duke of Buccleuch will probably never pay?

Patrick Harvie makes an important point about fairness. Without touching specifically on the changes that we are discussing today, I note that our aims in making the changes are to make the tax fairer and to make sure that we do two things when it comes to LBTT—that we protect as much as possible those at the lower income levels and that, as a policy objective with ADS, we protect those who are trying to get on the property ladder for the first time.

No tax is perfect, and that includes LBTT. The one change that we have made so far, since the tax was introduced, shows that we are willing to try to make these taxes as fair as possible, but we recognise that there will always be scope to do more.

LBTT was a slight improvement on what went before and the changes that we are discussing are a slight improvement in their own right, but is the Government still open to the wider argument that the tax base needs to include a modern approach to asset wealth values such as land and property, rather than merely to transactions?

Certainly, in terms of the way that the Scottish Government has taken on more tax powers over the past two years in particular. We are always looking at ways to make current taxes fairer and to ensure that, if there are improvements to be made more generally to the tax take, we consider those as well.

It is worth recognising that, if the order is approved today, it will raise almost an additional £40 million, which will go directly to supporting people who live and work in Scotland and rely on our public services.

Last week, I asked the Scottish Fiscal Commission for the reason behind its forecast of fairly healthy growth in LBTT revenue over the next five years. The answer was that the growth was not entirely attributable to the policy changes. They are yielding a net revenue gain for us, but the gain in LBTT revenue exceeds that. Why is that? I asked Derek Mackay the same question earlier and, of course, he took the entire credit for that gain being due to policy changes. However, there seems to be an additional element of gain for us in LBTT that is not quite attributable to the policy change.

I am more than happy for him to take the credit for that, and not me.

It is true to say that, for all years from 2018-19 onwards, LBTT is forecast to raise more than is removed through the block grant adjustment. The SFC was clear that the reduction in the forecast for this year relates to flatter house prices and transaction growth, which are common features across the entire UK housing market. The forecasts demonstrate that the tax works and will raise valuable revenue. Given that our taxes are so contingent on the performance of the rest of the UK, LBTT is vital.

Is one element that property values are moving through the thresholds and, therefore, more revenue is being yielded? The Fiscal Commission alluded to that being a potential explanation for part of the forecast growth.

The changes reflect the unique aspects of the Scottish property market, which is slightly different from the market in the rest of the UK.

As no other member has indicated a desire to ask a question, we move to agenda item 3, which is consideration of the motion on the order. I invite the minister to move motion S5M-15215.

Motion moved,

That the Finance and Constitution Committee recommends that the Lands and Buildings Transaction Tax (Tax Rates and Tax Bands Etc) (Scotland) Amendment Order 2018 be approved.—[Kate Forbes]

Do members have any further comments?

I do not intend to oppose the order, but I think it is worth putting on the record some of the issues that stakeholders raised in our previous evidence session about the potential impact of the tax changes on the private rented sector. We will need to keep a close eye on the market impact of the tax changes, because the jury is still out on the likely impact.

We can note that in the report.

The question is, that motion S5M-15215 be agreed to. Are we agreed?

Members: No.

There will be a division. I have missed saying that.

For

Arthur, Tom (Renfrewshire South) (SNP)
Bibby, Neil (West Scotland) (Lab)
Coffey, Willie (Kilmarnock and Irvine Valley) (SNP)
Constance, Angela (Almond Valley) (SNP)
Crawford, Bruce (Stirling) (SNP)
Harper, Emma (South Scotland) (SNP)
Harvie, Patrick (Glasgow) (Green)
Kelly, James (Glasgow) (Lab)

Abstentions

Burnett, Alexander (Aberdeenshire West) (Con)
Fraser, Murdo (Mid Scotland and Fife) (Con)
Tomkins, Adam (Glasgow) (Con)

The result of the division is: For 8, Against 0, Abstentions 3.

Motion agreed to,

That the Finance and Constitution Committee recommends that the Lands and Buildings Transaction Tax (Tax Rates and Tax Bands Etc) (Scotland) Amendment Order 2018 be approved.

The committee will produce a short report on the order. I thank the minister and her officials.

As previously agreed, we will take the next item in private. I close the public part of the meeting.

11:22 Meeting continued in private until 11:54.