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Land and Buildings Transaction Tax (additional amount: transactions relating to second homes etc) (Scotland) Amendment Order 2024 (SSI 2024/367)
Good morning, and welcome to the first meeting in 2025 of the Finance and Public Administration Committee. I wish you all a happy new year.
The first item on our agenda is an evidence-taking session with the Minister for Public Finance on a piece of subordinate legislation. I intend to allow around 30 minutes for the session, and I should say that the minister is joined by Scottish Government official Ewan Cameron-Nielsen, who is head of the fully devolved taxes unit. I welcome you both to this morning’s meeting.
I invite the minister to make a short opening statement.
Thank you very much, convener. Good morning to you and the committee, and a happy new year to you all.
The Land and Buildings Transaction Tax (additional amount: transactions relating to second homes etc) (Scotland) Amendment Order 2024 provides for the changes to the land and buildings transaction tax rates and bands that were set out in the Scottish budget on 4 December 2024. It increases the rate of the additional dwelling supplement from 6 per cent to 8 per cent, with the change intended to protect opportunities for first-time buyers and home movers by further helping them compete with buy-to-let investors and second home owners.
The change is also forecast to raise much-needed revenue at a time when public finances are under significant pressure. The Scottish Fiscal Commission estimates that it will raise an additional £32 million in 2025-26 and £31 million a year on average over the remainder of the forecast period through to 2029-30.
As you will be aware, the legislation provides for the rate increase to take effect the day after the Scottish budget statement—that is, on 5 December 2024. That is now a well-established arrangement for such changes; it prevents the possibility of forestalling, which would have reduced the revenue impact next financial year and would have run counter to the policy intent. It is also intended to provide certainty for taxpayers with the acknowledgement that the legislation must be approved by the Scottish Parliament in order to remain in force. As with previous rate changes, the order includes a transitional provision to ensure that anyone who entered into a transaction on or prior to 4 December will not pay the increased rate.
At this point, I take the opportunity to remind the committee of my entry in the register of members’ interests in respect of ownership of residential properties for let, and I look forward to members’ questions.
Thank you, and I should also mention that I, too, have a property that I let.
Thank you very much for that opening statement, minister. With regard to the objective here—which, frankly, is to raise money as well as having an impact on first-time buyers—what do you believe the elasticity of demand is? Will the impact on the buy-to-let sector and on second homes be mirrored by the number of people who will buy their first property? I am just creating this example out of thin air, but if there are 100 fewer buy-to-let properties, does that mean, according to the Government’s estimates, that 50 more people will be buying their houses, or will it be 150 or whatever? What is the Government’s thinking on that? How does it look at the impact of this on the sector that it is hoping to boost? What evidence is there that, when the additional dwelling supplement went to 6 per cent, there was a boost to first-time buying?
There is quite a lot in that question. With regard to the impact on the number of properties, clearly the number of properties in the market will remain the same. They will be owned either by landlords or by residents—that is, owner-occupiers. The trend over a number of years has been a gradual reduction in the number of second homes from 27,000 to about 24,000 since 2016-17 or thereabouts, but it is hard to ascertain how much of that has arisen as an impact of this specific measure.
There has been a 14 per cent reduction in the number of ADS transactions, but there has been an 8 per cent reduction in the overall number of LBTT transactions. The reduction in the number of ADS transactions has been slightly higher than the number of property transactions in general, but it is hard to know how much of that is due to the specific measure.
With regard to the increase in ADS from 4 per cent to 6 per cent, the SFC based its forecast on an assessment of behavioural impact, but what we have seen is that the revenue from ADS has been higher than that forecast. The SFC has used the same methodology for its projections, which suggest a significant increase of £30 million per year or thereabouts in the revenue coming through from ADS as a consequence of those changes being taken into account.
The final point to make is about the number of registered landlords and registered properties. Over the past three years, the number of landlords has been broadly similar, and the number of properties has slightly increased, so I suggest that there is no evidence that there has been any impact on the market.
If there were an equivalence in the number of people coming in to buy their first house as ADS increases, there would not be a £32 million increase. Obviously, therefore, you do not think that the behavioural impact will be that great or you would not say that there would be a £32 million increase.
You also say that there will not be an impact on the number of properties that are available to let, because it just means that people are buying a property and letting it out, rather than buying it to live in as an owner. However, surely, the issue with the build-to-let market is that houses are built with a view to letting them out. Has there been any impact on that sector?
On the build-to-rent market, transactions that involve more than six properties are excluded from ADS.
I am aware of that, but having gone through the process myself, I know that not everyone buys six properties to let. I have one, for example, and there are maybe 20 people in the same block who are in that position. Will there be an impact on that market? We know that it does not impact on companies so much, but about 180,000 landlords in Scotland have one or two properties to let and the number of people who own swathes of property is fairly limited.
My point is that the investment to build additional stock for the market is not impacted, because companies that are investing significant amounts to build large numbers of properties are excluded from ADS. As I said, the data that we have suggests that the number of individual registered landlords has been broadly static for the past three years or so, and that the number of properties that are registered for let has increased. That would suggest that there is not that impact on the market.
If someone now buys a buy-to-let flat for £200,000, they will have to pay £16,000 ADS. Will that not have to be transferred to the tenant who subsequently rents that property over a period of some years? Surely that will have an impact on the rent that tenants are expected to pay.
It will not impact on landlords who currently own property; it will apply only when a landlord buys a property, and that cost would be factored into the economics of that investment decision. The market rent would be understood by the landlord when making that decision, so that would all be factored in.
Rent is a separate issue in terms of rent controls and the proposed legislation in the Housing (Scotland) Bill. How rent controls are tackled is a separate issue.
Okay. I have a lot more to ask on this, but colleagues are keen to come in.
In your evidence thus far, it sounds as though the position is very complex, and the data that you have cited probably confirms that we are not entirely certain of the impact of the rise. Therefore, to pick up on the issue that the convener was probing earlier, is it reasonable and accurate to say that we do not have complete transparency—probably for a very good reason—about the impact of the original rise in ADS and that you therefore have not been able to model the potential impact of a subsequent rise from 6 per cent to 8 per cent?
A number of factors impact the outputs that result from these decisions—
Correct.
—so, everything else being equal, you would be able to have a controlled experiment and to understand exactly what the impact was. However, you do not have that, because there are all kinds of factors that we could talk about. There is a range of things that impact the decisions that individuals make about investing in properties or whether to enter or exit the market as well as the number of transactions and so on—you name it.
However, we can say fairly certainly that the SFC took a perspective on the impact on behaviour of the previous increase from 4 per cent to 6 per cent but that the data has shown that, if anything, the SFC underestimated the revenue as a consequence of the increase and that there has been less of an impact on the market than was anticipated. That is certainly what the data suggests with regard to that particular point. The SFC then used similar data to make an assessment of the future impact and, obviously, time will tell what the impact will be. You can have a very robust set of data, but all the indications are that, in Laffer curve terms, we are still probably well to the left of the inflection point with regard to ADS.
Yes, although the evidence of the impact of the previous increase from 4 per cent to 6 per cent does not necessarily follow with regard to the increase from 6 per cent to 8 per cent. It is your view that that might be the case, but we do not actually know that and the only thing that we could be certain of, if we did projections, is that they would be inaccurate. I ask about that because I want to know how you can evidence your assertion that the increase will support first-time buyers rather than merely fulfil the intention to increase the tax take? I am not against that per se, but is it not quite a bold statement that the increase in the rate of ADS will necessarily lead to more first-time buyers being able to access property?
It is evident that, as a consequence of the increase, the differential between what a first-time buyer and a landlord have to pay will widen, and, therefore, when they are competing against an invest-to-let landlord to buy a property, a first-time buyer will have a competitive advantage. Again, everything else being equal, it is fairly certain that a first-time buyer—or any buyer who is going to live in the property and will therefore not pay ADS—will have an advantage in that regard.
Okay. Convener, I should have drawn committee members’ attention to my entry in the register of members’ interests.
If I may, I will follow up one area in relation intra-landlord activity. There is evidence that, over time, quite a number of landlords have exited the market across the whole of the United Kingdom. That was triggered by the UK Government’s withdrawal, some years back, of mortgage interest tax relief. More recently, some landlords have been choosing to exit the market but to sell with the tenant in situ, so that another landlord buys the property. That is done for the very good reason that the property is somebody’s home. Surely a by-product of the increase in the rate of ADS will be more tenants being evicted, because a landlord will be less likely to buy properties. To what extent have you factored that consideration into any scenario planning that you have done?
That is an interesting point and I can see the member’s line of thinking. I am not aware that that specific analysis has been done, but I will undertake to look at that scenario to see whether we can furnish the member with data.
I do not know the names of the companies concerned, but I asked the question because I am aware that there has been increasing activity in landlord-to-landlord sales, which keeps tenants in place. Of course, at that point, the landlord is knowingly and deliberately taking a cut in what they might be able to achieve on the open market, to allow the tenant to stay in situ, and rightly so. However, this measure could discourage investors from coming to the table. Therefore, it would be worth while to look into that.
Indeed.
09:15
Good morning, minister, and happy new year. It is clear from what you have set out that the measure is raising revenue, but it is less clear that it is meeting its policy objectives. If you were to give a percentage level of confidence and assurance that the measure is actually meeting the objective of protecting opportunities for first-time buyers, what would that percentage be? Would it be 10 per cent, 50 per cent or 80 per cent?
I do not think that we can express it in those terms. First of all, as I indicated, the data shows that the numbers of registered landlords and registered properties are staying flat—indeed, there has been a slight increase in the number of properties in the recent period. That suggests that the anecdotal evidence that landlords are leaving the market is just that—it is anecdotal. At this stage, the data absolutely does not support it. As I said, we have seen a reduction in the number of second homes over a period of time, and I think that that trend predates the increases in ADS. Clearly, the policy is moving in the right direction.
As you rightly say, the amount of revenue raised in the most recent period has been in excess of the SFC forecast, taking into account the behavioural changes that it has factored in, so that policy objective is being delivered. It is self-evidently true that the measure puts buyers who do not have to pay ADS in an advantageous position over buy-to-let landlords, which is clearly the policy intent.
This is obviously a complex area, as you have alluded to. In relation to landlords’ sentiment, you talked about the supply being generally flat at the moment. What about the demand from tenants? Edinburgh, for example, has had the highest increase in rental prices anywhere in the United Kingdom—it was 12.6 per cent between 2022 and 2023. Although supply is flat, demand is rising and therefore, in a perfect market, you would surely assume that more people would enter the market to increase the supply.
You could argue that. However, as I say, the narrative that landlords are leaving the market clearly is not the case. You can compare that with the counterfactual of what would have happened had the policy not been introduced, but it is not true that landlords are leaving the market. It may be true that not as many are entering the market—I take that point—but, as I said, I do not think that we have data that supports that one way or the other. There is clearly a broader issue around housing supply more generally, but that is outside the scope of this discussion.
Is the principal policy intent to tackle what some people perceive as an unregulated buy-to-let market? That goes alongside some of the measures that you have introduced in relation to rent controls, evictions and so on. Alternatively, were the sort of people who want to buy cottages in Elie as second homes also in your sights?
It is probably not true to say that it is an unregulated market; it is quite a well-regulated market, but obviously there are policy changes, some aspects of which are around the scope and extent of the regulation. However, as I said, that is outside the scope of this discussion, which is on ADS.
With regard to the impact, as its name says, ADS is designed for additional dwellings, so it covers second homes and properties that are let out. In terms of both of those, making more homes available for buyers who are owner-occupiers is the direction of travel that we are keen to see, to give more of an advantage to first-time and other buyers in the market.
You have said that you think that the policy is providing an advantage to first-time buyers. One issue that has come up in evidence that I have had from constituents is that, because rents are rising significantly, first-time buyers are finding it increasingly difficult to raise deposits to be able to enter the market in the first place. If rents are rising partly as a consequence of landlords hoping to maintain yields—for example, to recover the additional ADS—could that not mean that rents are rising disproportionately compared with those in the rest of the UK and that Scottish first-time buyers are therefore at a disadvantage, because it will take them longer to save the deposit to enable them to leave the rental market and go into the ownership market?
That was quite a roundabout argument. There are lots of things that would impact people’s ability to have the funds to put down a deposit; rent is only one part of that. Other aspects are the cost of living, the measures that we are taking to support first-time buyers, and the increase in ADS, which I think will help to shift the balance in the market in favour of first-time buyers and others who are buying a property in order to live in it.
The argument that you are making is that the landlord is charged the additional ADS, which is then charged to the tenant, who would be unable to pay a deposit as a consequence. I think that the impact of the additional ADS would be diluted in that process and I suggest that there are other things that are probably more significant for the tenant’s ability to compete in the market, if they choose to do so. There is a lot of data on that across the piece, which you could look at, which could help to make that argument.
You have identified that there is a lot of data and that there are many other market-related issues. How and when do you intend to review the impact of the changes to LBTT and ADS?
We have just completed an ADS review that pulled up some specific items, or wrinkles, as you might want to call them, in the system, which we are addressing. An LBTT review is coming up shortly.
The Scottish budget for 2025-26 committed the Scottish Government to conducting a review of aspects of LBTT, which will launch in the spring. The review will be an opportunity to look a range of aspects of legislation and to reflect on how they are working in the current context, 10 years on from the introduction of LBTT. It will provide an opportunity to review various aspects of LBTT, potentially including ADS, although that would be for ministers to decide, based on discussions and engagement with stakeholders.
Would it not be better to hold off any further increase in ADS until you have more data and evidence from the review process?
It is an on-going process and will help to inform the broader LBTT picture. At each point in the budget cycle for the annual budget, we make decisions about what tax rates should be. At this point, I think that making the change in ADS rates is the right decision.
Finally, if there was any evidence to suggest that buy-to-let investors were leaving the market and that that was constraining supply, would the Scottish Government be willing to look at any form of exemption or reduction in ADS for those who buy properties for the purpose of putting them on the rental market?
Those properties are not going anywhere. If they are not bought by an investor to let, they will be bought by someone who will live in them. If those properties are being bought by someone who is going to live in them, we would not necessarily see that as a negative consequence. The issue of build to rent and investment coming in to add new capacity to the system, which is hugely important, is a separate issue, but it is outside the scope of ADS, because it does not apply to large numbers of properties.
I should start with a note of thanks to the minister, recognising that I put the proposal on ADS to the Government on behalf of the Greens in discussions ahead of the budget, so I am glad to see that it is in the first draft.
I will follow on from Craig Hoy’s line of questioning about the Government’s ultimate policy objective, and take up the point that the minister made to Michelle Thomson about us being quite far left of the inflection point on the Laffer curve, as he put it. Is the Government’s objective to maximise the benefit for first-time buyers and maximise behaviour change in the market and, therefore, reduce the amount of revenue that will be received as a consequence, short of the point at which we start to lose revenue as a result, or is there a point of balance before that that the Government is trying to reach? I am trying to understand to what extent the primary objective is to change behaviour as opposed to raising additional revenue.
It is important to recognise that the housing market is always going to be a mixed market, if you want to call it that. People will want to buy houses and people will want to rent them, because they want to stay somewhere for a short period of time or because it suits their financial, family or employment situation. There will always be a need for people to rent properties, so a supply of rental properties is obviously important to have in the mix. It is not that we want everybody to be a property owner; it is about recognising that there is a mixed market and understanding what policy measures we can take that are best suited to ensuring that the market is well balanced.
The measure, which supports first-time and other buyers to live in properties by giving them a competitive advantage, is the right thing to do. It fulfils a policy objective and raises additional revenue, which is clearly welcome, but there is no end game in the sense that we do not want to significantly alter the market in terms of the number of rental properties versus the number of owner-occupied properties.
I have a small, specific point, which does not relate directly to the policy to increase ADS. Would the Government consider a potential ADS exemption in situations where a person in receipt of disability living allowance is able to live independently but is not able to own their own home, and a relative, for example, buys it for them?
I have had a couple of pieces of casework where someone has been liable to pay ADS because they have purchased a property on behalf of a disabled family member who can live independently but is not in a position to own the property.
Thank you for raising that issue, which I know you have raised before. There have been several tweaks made over time to the eligibility process, as various issues have arisen. We can certainly look at what scope there is to address that issue.
Where is the evidence that this policy is improving investment in the housing market and the spirit of entrepreneurialism that the Scottish Government is very keen to deploy?
As I have said, investment in new builds and large purchases are outside the scope of the policy. There has been a slight increase in the number of registered properties, and the number of individual landlords is broadly flat, so the policy is not having a detrimental impact on the sector in the way that some may posit.
To be specific, where is the evidence that the policy is creating investment potential in the housing market?
The purpose of the policy is to raise revenue and rebalance the market so that people who want to buy a house to live in—first-time buyers or otherwise—have a competitive edge over those who are buying a property to let.
The data shows that the number of registered landlords is broadly flat, and the number of registered properties has increased over the past two and a half to three years, so the policy is not having an impact on that.
The overall scenario is that there are considerable difficulties in the housing market, which the Scottish Government and other parties are grappling with.
Is it not important that the policies that aim to address those concerns create investment opportunities, particularly for small developers and people who are there to provide a greater mix and supply of homes? I am interested in where the evidence is that the policy is driving that.
You have to distinguish between investment for the buying of existing properties and investment for the building of new properties. The investment is going into the market to—
They are linked.
They are linked in the sense that, if you want to build new properties, there are a range of factors to be considered that are relevant to those decisions. However, at that end of the market, ADS does not apply to the purchase of more than six properties.
A typical buy-to-let landlord does not build a new property to put on the market; they buy an existing property to let it out. A property is either going to be bought by them or by someone who wants to live in it, but the total number of properties in the market stays the same.
09:30
However, do you agree, minister, that it all comes down to the issues that the convener raised about behavioural change? Behavioural change is important when it comes to not only demand for housing but supply, which Craig Hoy and Michelle Thomson mentioned. Surely there is a need for much more data to be able to see what effects the measure is having.
I have pages and pages of data in front of me. We know the number of transactions. We know what is happening with revenue, we know how that plays out against the forecast that the SFC put together for the previous increase, and, indeed, for this increase, we know what the tax elasticities are in the assumptions that it has made. We know what the numbers of registered landlords and registered properties are, we know what the revenue forecasts are and we know how the reduction in ADS transactions compares with the shift in the overall number of LBTT transactions. We have a lot of data, and the data suggests that that is not having the detrimental impact on the market that some might suggest.
If there is any more data that the member thinks that we should be looking at, I would be interested to hear what that would be.
That was in my question.
Thank you very much, minister and colleagues.
The next item on our agenda is to continue taking evidence on the Scottish budget 2025-26. Sorry—before we come to that, we had better finish off dealing with the subordinate legislation. My mind is already on the Auditor General for Scotland.
We turn to item 2, which is formal consideration of motion S6M-15749. I invite the minister to speak to and move the motion.
Motion moved,
That the Finance and Public Administration Committee recommends that the Land and Buildings Transaction Tax (additional amount: transactions relating to second homes etc) (Scotland) Amendment Order 2024 (SSI 2024/367) be approved.—[Ivan McKee]
Do any members wish to speak?
I did not ask any questions about the instrument, because I really think that the measure is self-evidently a good thing. It will, I hope, raise revenue and help first-time buyers. It just seems absolutely the right thing to do.
The question is, that motion S6M-15749 be agreed to. Are we agreed?
Members: No.
There will be a division.
For
Gibson, Kenneth (Cunninghame North) (SNP)
Greer, Ross (West Scotland) (Green)
Marra, Michael (North East Scotland) (Lab)
Mason, John (Glasgow Shettleston) (Ind)
Thomson, Michelle (Falkirk East) (SNP)
Against
Hoy, Craig (South Scotland) (Con)
Smith, Liz (Mid Scotland and Fife) (Con)
The result of the division is: For 5, Against 2, Abstentions 0.
Motion agreed to,
That the Finance and Public Administration Committee recommends that the Land and Buildings Transaction Tax (additional amount: transactions relating to second homes etc) (Scotland) Amendment Order 2024 (SSI 2024/367) be approved.
I thank the minister for his attendance and participation today.
Thank you very much.
09:32 Meeting suspended.Air ais
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Budget Scrutiny 2025-26