Buyers and sellers of homes in Scotland are rushing to close deals before the
first new tax in 300 years imposed by a government in Edinburgh takes force in April.
The regional
parliament approved the tax on property transactions using powers granted to it
by the U.K. prior to Scotland ’s
failed bid for independence in September. The levy hits buyers of expensive
homes the hardest, while sparing Scots purchasing the cheapest housing.
“I’ve already
had phone calls from people wanting to accelerate the process to make sure that
their property is sold prior to April,” Edward Douglas-Home, a partner at
Knight Frank LLP’s Edinburgh office, said on Oct. 10, the day after the rates
were announced.
The nationalist
government’s plan, designed to reduce inequality, replaces a U.K. duty that Scotland ’s finance secretary called
“unfair.” The Scottish law will boost taxes by an average 56% for buyers,
according to a calculation by realtor Savills Plc. The higher costs, in
combination with U.K.
mortgage restrictions, threaten to hobble the housing recovery in Scotland ,
where price gains have slowed this year.
“The cost of
transacting property is going to go up in Scotland and all else being equal, you’d
expect that to dampen the market and lead to less liquidity,” saidEd Stansfield,
chief property economist at Capital Economics in
London, who has worked as adviser to the U.K. Treasury.
Finance
Secretary John Swinney said on Oct. 9 that the Land and Buildings Transaction
Tax, which takes effect April 1, will help 49,000 buyers at the lower end of
the market. Purchasers of homes costing 135,000 pounds (S$275,500) or less will
incur no tax at all.
The rates for
Scots paying the levy apply to the portion of the home’s value that falls
within different bands: A 2% on values up to 250,000 pounds; 10% up to 1
million pounds, and 12% on homes worth more than that.
Swinney
announced the rates as part of his budget for the next financial year. While
the tax law was passed last year, the bands are still subject to approval by
parliament, where the Scottish National Party controls
the majority.
The current
U.K. Stamp Duty is a “slab” tax, in which a single rate applies to the entire
home price. It starts at 1% for houses between 125,000 pounds and 250,000 pounds,
rising to a maximum 7% on properties worth more than 2 million pounds.
Savills
Research said the change would increase the tax on a 363,000-pound Edinburgh average family
home to 13,600 pounds, or 25%. Taxes on a home valued at 450,000 pounds would
increase by 65%.
“We were all
very shocked,” Ben Fox, an associate director for Edinburgh at Savills, said about the rates.
“These were much more aggressive than we certainly had anticipated.”
The standard variable rate in
the U.K.
was 4.45% on Sept. 30, up from 4.35% a year earlier, according to the BOE. The
yield on 10-year government bonds was 2.20% today, down from 2.63% a
year ago.
Mortgage lending has been growing in Scotland this
year. U.K. lenders granted
28,600 home loans in Scotland
in the first half of this year, an increase from 23,800 in the first two
quarters of 2013, according to data from the Council of Mortgage Lenders.
That’s down from 104,900 in all of 2006, before the global financial crisis the
following year.
The housing levy was authored by the
SNP-controlled government. The party won a landslide victory in the 2011
parliamentary elections that paved the way for the vote on its flagship policy
of independence. The parliament had
been re-established in Edinburgh in 1999 after
being disbanded in 1707 with the Act of Union that formed the U.K.
The semi-autonomous government has
power over health, transportation and education, while most taxation, along
with foreign policy and social welfare, is controlled from London . The U.K. ,
in a bid to appease nationalists, gave Edinburgh
authority over some tax policy, such as housing, two years ago.
In the referendum
for independence, 55% of Scots opted to remain part of the U.K. as Prime Minister David Cameron and the main U.K. political parties pledged to cede more
power to Scotland ,
including over personal income tax.
The “no”
campaign targeted Scotland ’s
future currency by ruling out sharing the pound with an independent state. That
raised the possibility of Scots having mortgages in a currency they didn’t get
paid in.
The property
levy fits the SNP’s agenda of helping lower-income Scots in the face of benefit
cuts by the government in London and expected
proposals for tax breaks for wealthier earners by Cameron ahead of the 2015 U.K. election.
Invoking
economist Adam Smith, who developed his theories and lectured at Edinburgh University , Swinney, the finance
minister, said the new regulations were based on the principle “that taxes
should be proportionate to the ability to pay.” The levy will ensure
“certainty, convenience for the taxpayer and efficiency of tax collection,” he
said in an e-mailed statement.
House price
gains have been slowing in Edinburgh
this year. The average value of a home was 220,174 pounds after an annual rise
of 3.6% in the July to September period, the ESPC law firm group said in its report last week. That compares with a 5.6%
gain in December through February.
Nationwide,
housing sales have been expanding in fiscal 2014. The total value of
residential sales was 13.8 billion pounds, 22% more than the previous year and
the highest since the height of the previous boom in 2008. The value is down
7.4% compared with 2004.
Realtors said
they expect the new tax to slow the market by making it harder for prospective
buyers to save enough for a down payment and secure a mortgage. Douglas-Home of
Knight Frank said purchasers will
look to have some or all of the costs absorbed by reductions in housing prices.
“It’s going to
significantly reduce their ability to spend,” he said.
Source: Bloomberg
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