Scotland's Budget for 2025–26, published in December, announced
an immediate increase in the surcharge in land and buildings
transaction tax (LBTT) on the purchase of second and rental
homes, from 6% to 8%.
This continued a trend of increases in this ‘additional dwelling
supplement', and replicated an increase in England and Northern
Ireland's equivalent stamp duty land tax (SDLT) surcharge from 3%
to 5%. In both cases, the move makes an already highly
economically damaging tax even worse.
Despite the publication of a Tax Strategy alongside the Scottish
Budget, it is not yet clear what the Scottish Government's vision
for tax policy is – but increases to LBTT are not consistent with
any economically sensible strategy.
These are among the findings of the first chapter of IFS's third
annual Scottish Budget Report, ‘Assessing Scottish tax strategy
and policy'.
Looking in more detail at the LBTT policy:
- The increase in the additional dwelling supplement means that
a landlord buying a £500,000 property, for example, must now pay
£63,350, or 12.7%, in LBTT on top of the purchase price. This
compares with £23,350, or 4.7%, if bought as an owner-occupier's
main home.
- The change will encourage owner-occupation, but will make it
even more difficult and expensive for those who remain in the
rental sector – tenants (who are likely to face higher rents as a
result of the policy) as well as landlords. And the policy does
not just penalise the rental sector; it penalises transactions
within the rental sector. Preventing a landlord who wants to sell
their property to another landlord from doing so is bad for both
landlords and tenants.
- This increase in the additional dwelling supplement comes on
top of a gradual rise in LBTT through fiscal drag: the long
freeze in LBTT thresholds means that 64% of housing purchases
were above the £145,000 threshold for paying the tax in 2023–24,
up from 47% in 2015–16, and the number subject to the 12% top
marginal rate trebled in that time – still to only 1.2% of
transactions, but accounting for 23% of revenue from residential
LBTT (excluding the additional dwelling supplement).
- This ill-advised direction of travel is similar to that seen
in England and Northern Ireland – though, as with income tax,
bills in Scotland are slightly lower for the majority but much
higher for the well-off.
The Budget also made modest changes to all of Scotland's other
devolved taxes except council tax. As with LBTT, these changes
largely followed the patterns of recent years, with increases in
income tax for high-income taxpayers and further differentiation
of business rates bills for different types of ratepayers.
The Tax Strategy published alongside the Budget does little to
help us understand the rationale for the changes announced in the
Budget or whether we should expect further such changes in future
if the current Scottish Government is re-elected in 2026.
Stuart Adam, a Senior Economist at IFS and one of the
authors of the chapter, said:
‘The Tax Strategy makes the right noises on a range of issues –
such as evidence-gathering and engagement, improving
administration and public understanding, and considering tax
policy in the round – and should be welcomed in the context of
the lack of such a document covering taxation as a whole at the
UK level. It goes beyond the usual refrain of “more devolution,
please” to say something at least about policymaking for taxes
already devolved to the Scottish Government.
‘But it is not a strategy for tax policy. It does not tell us
what kind of tax policy the Scottish Government thinks would best
promote its objectives; it does not provide a vision of what
individual taxes or the tax system as a whole should look like in
five or ten years' time. It is more of a framework for producing
a strategy than a strategy in itself.
‘Whoever is in government in Scotland following the 2026 election
should publish a strategy early in its term of office that does
set a clear direction for policy for the rest of the next
Parliament. But it is hard to think of any economically rational
strategy that would justify recent policy on LBTT, which has made
Scotland's most ill-conceived tax ever bigger and more damaging.'
