History was made on 9 October when John Swinney announced the Land and Buildings Transaction Tax which will replace Stamp Duty Land Tax next April. In doing so the Scottish Finance Minister introduced the first tax to be levied by a Scottish Parliament since the Act of Union in 1707.
The new tax is an unambiguous improvement on its predecessor. Stamp Duty was characterised by its notorious “slab” structure whereby the tax rate triggered when a threshold was passed applied to the entire value of the property. This was perhaps tolerable when the tax had a simple structure – a flat rate 1% levy on properties over a single threshold (which in 1984 and 1993 was set at around the average house price).
But from 1997, the tax became ever more elaborate. Two additional bands were added in 1997, and at least six further changes were enacted up to 2011. By then there were five rates (plus a separate entry threshold for first time buyers), including a new 5% rate for properties sold for more than £1 million. Amid all this tinkering, the tax assumed almost magical properties.
The first overt attempt to use the tax to manipulate the housing market occurred when it was effectively suspended in an attempt to revive the housing market in the early 1990s. (It probably had a moderate success.)
The higher rates introduced after 1997 were justified in part by an ambition to exert a brake on house price inflation, whilst an exemption was intended to revive the housing market in depressed neighbourhoods.
In addition to concessions for first time buyers, a further exemption was introduced, avowedly “to help kick-start the market in zero-carbon homes, encourage micro-generation technologies, and raise public awareness of the benefits of living in zero-carbon homes.” (Did anyone in the Treasury seriously believe this?)
George Osborne has been unable to resist further embellishments, including a 7% rate for properties over £2 million (but only if the property is used for broadly commercial purposes) and a 15% rate for properties purchased by companies.
So a tax that had always been poorly structured had now become both complex and deeply incoherent. It has also prompted obvious market distortions, with sales bunching at values beneath the main £125,000 and £250,000 thresholds, as this graph from the Scottish Government illustrates.
The crucial difference between the new property transaction tax and its predecessor is that it now adopts a ‘slice’ structure, whereby the rate triggered by a threshold applies only on that part of the price above the threshold – like income tax rates. This in itself is a welcome move. Under the new tax, the entry threshold has been raised to £135,000 at which point 2% will be charged on the price paid up to a second threshold at £250,000, when the tax rate rises to 10% on the excess. A final band, set at 12%, will apply to the part of the price paid for properties over £1 million.
Given that the reform is intended to be revenue neutral, taxes are being shifted onto more expensive properties. This accounts for some of the reaction in the press. The Herald led with the headline “Swinney’s stamp duty revamp is tax on middle classes” – the on-line edition providing the crucial “they would say that wouldn’t they?” caveat by adding “say estate agents.” Such are the diminished resources available to the Glasgow-based broadsheet that the best it could do was to phone round a few estate agents asking for suitably salacious quotes.
So the managing director of Slater Hogg and Howison obliged with the insight that “This is a tax on the already-squeezed middle.” Even better, a director of the Glasgow Solicitors Property Centre labelled it “victimisation politics… either deliberately punitive of those who have worked and saved hard…” Writing in the Telegraph, Allister Heath described it as “an awful, divisive levy.” Lazily, the Financial Times identified it as a “mansion tax” – even though the term is now widely ascribed to the recurrent property tax on very expensive properties first proposed by Vince Cable, but now adopted by the Labour Party.
Yet the estate agents and commentators routinely confuse the mean with the median in order to claim that measures that affect people who are, by any standards high income, wealthy, or both, hit people who are not. They do protest too much. It is worth noting that the mean average amount paid for a house in Scotland is was about £150,000 in the first quarter of 2014, whilst the median was £125,000. The graph gives an idea of the distributional effects – the point at which people start paying more is £324,300. The Scottish Government believes that 90 per cent of purchasers will be at least no worse off than they are now.
The “squeezed middle” have benefited enormously from the Scottish Government’s freeze on the Council Tax (dating back to 2007) and the Bank of England’s ultra-low interest rate policy that has kept mortgage rates at historically low levels. Whilst the tax on a £500,000 home would, according to Heath, rise from £15,000 to £27,300, it is worth remembering that sums such as these – and more – in excess of valuation are offered routinely by purchasers anxious to secure properties under Scotland’s “offers over” system, whereby aspiring purchasers submit sealed bids on a set date.
In reality, the size of gains and losses are likely to be moderated by the impact on house prices. Where taxes are reduced, property values will to an extent rise; and where taxes are increased, other things being equal, prices will fall – the capitalisation effect. Hence the tax change will not be quite so good for first time buyers as the Government claims, and not quite so bad for those poor souls contemplating the purchase of a £500,000 property, as the estate agents suggest.
A key question relates to uprating. Stamp Duty was not uprated between 1984 and 1993 during which time house prices more than doubled. It was therefore subject to “fiscal drag.” However, when it was uprated (for example in 2005 after eight years), the more than doubling of the entry threshold took place during the house price boom – so stoking up further inflation in the name of affordability.
Mr Swinney and his successors would be wise to uprate thresholds by general inflation, allowing only real property prices rises to be captured, and so exert a mild counter-cyclical effect. This approach was advocated by the Joseph Rowntree Foundation’s Housing Market Taskforce (to which I was academic advisor).
Whilst the reform to the structure of stamp duty is to be welcomed, many economists argue that as a transaction tax it is inefficient and should be abolished. This was the conclusion of the Mirrlees Review, which instead advocated a recurrent housing services tax.
However, Stamp Duty is a side issue compared with the future of the Council Tax. Frozen since 2007 and based on 1991 property values this tattered remnant of property taxation mocks the notion of local government in this country – as Andy Whiteman has eloquently argued. The Scottish Government is committed to its reform, too. It is committed “to produce a fairer tax based on the ability to pay. All potential alternative approaches will be considered as this work is progressed.”
Whether a progressive land or property tax, with due regard to people’s ability to pay, can be designed and implanted will provide a key test for the Scottish Government, and indeed for Scotland’s appetite for progressive politics.