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A Robust and Active Residential Property Market - 18th March 2016 - Click for larger version A Robust and Active Residential Property Market - 18th March 2016

Our firm’s private client team is seeing the highest level of conveyancing transactions since 2008.

In this article we explore what’s going on…

The Scottish property market is enjoying what appears to be a residential revival with recent statistics published by Registers of Scotland reporting a 14.5% increase in residential sales in the third quarter of 2015-2016. This is in comparison to the same period in the previous year, and represents the highest volume of sales in any quarter since 2008.

Registers of Scotland have also reported a 1.6% increase in prices with prices at the highest since they started recording statistics in 2003.The question, however, is what has caused this recent revival and will it be short lived due to recent dramatic changes in Land and Building Transaction Tax (LBTT, formerly Stamp Duty) for second properties?

HELP TO BUY AND REPLACEMENT SCHEMES

Most of us will now be aware of the UK Government’s various Help to Buy schemes and incentives. These come in various forms such as the Mortgage Guarantee Scheme and the Affordable New Build Scheme. Key elements are that the assistance generally only applies to new build properties with the government obtaining a percentage stake in your property (secured by way of a second mortgage with no regular repayments). The schemes are designed both to help buyers join or climb the property ladder (thus aiding the resurrection of the property market) and also to help rebuild our economy by encouraging builders to build more properties. The schemes are long term investments by the government with the expectation that property prices will continue to rise resulting in the return a net profit upon sale.

CHANGES IN LBTT FOR SECOND PROPERTIES

Following the UK government’s autumn budget, the Scottish government has confirmed that from April 2016 a new, additional, Land and Buildings Transaction Tax (stamp duty) charge of 3% will be levied on ‘additional homes’ purchased for more than £40,000. This will be in addition to the normal rate of LBTT, if any. This charge will increase considerably the tax payable on buy-to-lets and second homes. The aim of the charge is apparently to support first-time buyers’ entry into the property market.

There are concerns this tax will cool activity in the Buy to Let sector as this additional charge would make, for example, a £250,000 second property liable for an extra £7,500 in LBTT. The tax will also apply to second properties below the current LBTT tax threshold of £145,000, thus rendering transactions subject to tax which would not have been previously. Another concern raised regarding the change surrounds the situation where completion of a concurrently running sale is delayed, creating a temporary second property issue. The suggestion is that the Scottish Government will implement an upfront payment and rebate system, rather than a deferred charge. This would mean that individuals in this situation would find themselves liable to pay an additional LBTT charge, and apply for a refund at a later date.

REDUCTION TO THE MORTGAGE INTEREST TAX RELIEF

This additional charge to LBTT comes on the back of the UK Government’s July 2015 budget announcement of a reduction to the mortgage interest tax relief for private landlords. Currently Buy to Let mortgage interest may be deducted from the rental income before tax is paid. Income Tax is then paid only on the difference between the mortgage interest and the income, therefore is only paid on profits. Higher and additional rate tax payers can get relief of 40-45% by offsetting their Buy To Let mortgage interest against their income in this way. This situation will change from 2017, whereby the relief will be limited to those who fall into the basic rate of income tax. Those in the higher bands will be restricted to a flat rate of 20% relief, with this rate to apply to all individuals by 2020.

Whilst some inhibition of Buy to Let rental activity may be good news to the first time buyer, the combination of the above tax liabilities has led to some landlords indicating that they may leave the sector all together. A survey conducted by the Residential Lettings Association of its members found that 10% of its members intend to leave the market. Another survey conducted by the listings site SpareRoom.co.uk found that out of 1,054 landlords 45% planned to increase their tenant’s rents on in 2016, with 38% saying it was a direct consequence of the government's recent legislative changes.

It will be interesting to see how the residential property market reacts to these changes.

For more information on buying and selling residential property and related issues please contact Maureen Matheson at maureen@macdonaldhenderson.co.uk or on 0141 248 4957.

Last updated: 11.50am, Friday 18th March 2016

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