Scotland’s commercial property market could be left less competitive than the rest of the UK as a result of the Scottish government’s recent announcement of the successor to stamp duty. The tax burden will rise for most commercial properties and market experts are asking whether this is a taste of the future in post-referendum Scotland.
Finance secretary John Swinney (pictured right with SNP leader in waiting Nicola Sturgeon) announced the details of the land and building transaction tax when he set out the 2015-16 draft Scottish budget last week. The budget was the first major statement to emanate from Holyrood since the “no” voters triumphed in September’s independence referendum. With rates of up to 12% proposed for residential property, the proposal was a headline maker.
The Scottish Property Federation said the proposed LBTT rates announced by Swinney could adversely affect major commercial property deals and make Scotland less competitive than the rest of the UK.
The LBTT, which will go live in April 2015, is supposed to be tax neutral, raising no more than its predecessor. Although commercial property was in Swinney’s sights, the higher-profile target is the residential market, where it is intended to remove distortions.
CBRE Scotland chairman Doug Smith says the stamp duty land tax rates, now uniform throughout the UK, operate on a “slab” basis, in which different ones are applied to different values of transactions. When a transaction price crosses the threshold into a higher band the whole of the price, not just the proportion in that band, is taxed at the higher rate.
“The LBTT is designed to be a progressive tax,” says Smith. “Tax will be paid on each band to the extent that the price or consideration falls within any band. A little more mathematics is required for the calculation, but it is not a major change.”
Swinney’s rationale is that the slab structure leads to bunching of sale prices just below SDLT price thresholds with few sales occurring just above these.
“The move to a progressive rate structure is designed to ensure that the tax charge is more proportionate to the taxpayer’s ability to pay than under SDLT,” the budget statement says.
This will benefit first-time home buyers and small businesses. But Smith says this benefit comes at the cost of a higher tax burden on larger commercial and residential transactions.
CBRE estimates that the “tipping point” will be around £383,000 for commercial properties. Those above this will carry a higher tax burden and those below will benefit from a reduced tax burden.
This will affect capital values, Smith says.
“The valuation of commercial property responds quickly to such changes and on a very simple analysis the value of these properties will reduce by the amount of the increased LBTT burden.”
Not only will this affect investment performance but, perversely, it will affect loan-to-value ratios for lenders “at a time when exposure to commercial property for banks was beginning to improve,” Smith adds.
Most institutional investment stock in Scotland will have a value substantially greater than the £350,000 threshold.
“In practice the value of these properties will fall by an amount approaching 0.5%,” Smith said.
The Scottish Property Federation says that, because commercial property deals over £350,000 will be charged the highest tax band of 4.5%, “a £23m office transaction, for example, would have to pay £85,000 tax more than it would under the SDLT regime in the rest of the UK, while a major shopping centre transaction for £48m might pay some £230,000 more in tax”.
Smith also believes that Scotland will be put at a relative disadvantage when compared with other areas of the UK where stamp duty still applies.
“Is the extent of the disadvantage sufficient to dissuade investment?” Smith asks. “Probably not, but it may raise in the minds of investors and others the question of how the Scottish government might approach other areas of taxation that could be included in the wider ‘devo-plus’ settlement.
“The test will be whether, for larger commercial projects, this slight extra burden stifles what is only a very fragile recovery in the development markets. Most likely not, but it does not make the challenge any easier,” Smith says.
