Scotland is to replace stamp duty with a Land and Buildings Transaction Tax – the first tax created by the Scottish Parliament since before the union.

The new tax, which comes into effect in April 2015, aims to remove the distortion in the housing market. As it stands, house prices tend to ‘bunch’ around the current bands.

Progressive

The new rates will only be payable on the portion of the total value that falls within each band. This contrasts with stamp duty, under which the higher tax rate is payable on the whole purchase price when a threshold is crossed.

The rates also aim to take 5,000 additional house purchases per year out of tax with nothing charged on the first £135,000 of a house purchase. 

The new tax brackets mean no tax will be payable on 45% of transactions and there will be a reduction in the tax charge, relative to stamp duty, for a further 44,000 house purchases up to £325,000.

Hitting the most expensive properties

Under the new tax, 90% of homebuyers will either pay less or the same amount as they would under stamp duty.

Tax savings on an average priced property (£162,000) will be around £1,080.

Under the new system, those buying homes over £1m will pay 12%, compared to just 5% under stamp duty for homes between £1m and £2m.

According to its tax calculator, a buyer of a £1m property would pay just over £77,000 in tax in Scotland. Under stamp duty this would be £50,000.

Malcolm Leslie, partner in Strutt & Parker's Edinburgh office, said: “Today’s announcement creates a six-month window of opportunity for buyers at the middle and top end of the market to purchase a property before the tax they will have to pay increases considerably. One of the positive impacts of this announcement on residential  property markets, which are still adjusting following the recent referendum result, is that it may spark a surge in activity in the late autumn and winter as buyers seek to secure a property before the punitive tax hike is implemented on 1 April 2015.”

Ability to Pay

Finance Secretary John Swinney said taxes should be proportionate to a buyers’ ability to pay and hopes this new system would reflect that.

He said: “We now have the chance to apply the principles set out by Adam Smith – that there must be certainty, convenience for the taxpayer and efficiency of tax collection and that taxes should be proportionate to the ability to pay.

“The old stamp duty was outdated - causing unfair tax hikes at set property prices. This led to the market being distorted and led people to try to avoid tax.

“Our proposed residential transaction rates will be more proportionate to the house price, and means that the tax is fairer as it is based more closely on the buyer’s ability to pay.

“For example, a couple buying their first home for £140,000 will pay £100 under the new system, £1,300 less than the stamp duty charge which applies now.”