Welsh Government have announced the proposed rates and bands for LTT which will apply to land transactions involving Welsh land from 1 April 2018. LTT will be the first tax introduced by a Welsh Government in almost 800 years. LTT will replace Stamp Duty Land Tax (“SDLT”) with Welsh Government having to replace the revenue generated by SDLT.
Welsh Government has made great play of the progressive effective of the rates and bands of LTT with the assistance that will be provided to first time buyers. However, commentators have expressed concerns that there could be an adverse impact on the Welsh economy if property developers decide to take their investment in large property developments outside Wales.
The new rates and bands
New rates and bands have been announced for both residential and commercial property transactions. As mentioned above, the new rates are “progressive” which means that buyers of lower value properties will pay less LTT compared to SDLT, while the buyers of more expensive properties will pay, in some cases, substantially more LTT than SDLT.
The current rates for SDLT are:
Purchasers of an additional residential property and any purchase by a company (and other non-natural persons) will be subject to an additional rate of LTT of 3%, which is in line with the current rates of SDLT.
The “break even” point where LTT becomes more expensive than SDLT is £400,000. Welsh Government estimate that transactions above this threshold account for 6% of residential property purchases in Wales each year. By increasing the LTT threshold to £150,000 Welsh Government believe that the average first time buyer in Wales will pay no LTT and save £280 in tax when buying at the average first time buyer price of £139,000 in 2018/19.
Residential purchases below £250,000 will also save with LTT compared to SDLT, with the same amount being charged between £250,000 and £400,000. As mentioned above, more LTT will be payable compared to SDLT on properties worth more than £400,000. Unless the thresholds are increased in line with house prices, the increase in LTT rates will catch more and more transactions.
The increase in rates of LTT may encourage purchasers to accelerate the purchase of their “expensive” house before 1 April 2018. Welsh Government state in their Tax Policy Report, perhaps optimistically, that they assume UK Government will reimburse the Welsh Government with the additional SDLT revenues resulting from the acceleration of the purchases.
The differences between the rates of LTT and SLT for commercial property are more stark.
As can be seen from the table, there is a reduction in the charge to LTT for lower value properties, creating a saving of £1,000 for properties between £250,000 and £1m. LTT becomes more expensive compared to SDLT at values in excess of £1.1m. Welsh Government argue that the Welsh commercial property market is made up of a large share of relatively low-priced transactions below the £150,000 threshold. In addition, approximately 30% of Welsh transactions were priced at £500,000 or more and represent a significant share of the market with a corresponding share of the stamp duty revenue.
The same approach has been taken with the rates of LTT applied to commercial leasehold transactions.
In the case of SDLT, the 2% rate of tax takes effect when the NPV exceeds £5m. Welsh Government believe the lower commercial property and rental values in Wales support the introduction of higher rates and lower thresholds. Welsh Government estimate that there will be fewer than 100 transactions in Wales with a NPV of £2m or more in 2018/19.
By adopting a progressive LTT rate setting policy, Welsh Government are clearly trying to assist property purchases at the lower end of the market and having to protect the overall revenue by raising the rates of LTT for higher value transactions. It remains to be seen whether a £500 tax saving on buying a £150,000 house will really make a difference. The collection of LTT will become reliant on a smaller tax base comprising a relatively small number of high value transactions.
More worrying is the possible impact on large commercial property developments. One of the aims of Welsh taxes is to “Deliver Welsh Government policy objectives, in particular supporting jobs and growth”.
With the squeeze on profit margins, it will be interesting to see if property developers are put off by the extra 1% cost of doing business in Wales on developments over £1.1m compared to carrying out the same project over the border in England. Perhaps Welsh Government will end up paying the 1% cost as a “grant” to encourage investment in order to bring jobs to Wales. At the very least, you can expect Commercial Property lawyers to cancel holidays for the first three months of 2018 as they rush to exchange contracts before the increase in rates of LTT for high value property transactions!
Welsh Government will be hoping that Philip Hammond does not announce changes to SDLT rates in his Budget on 22 November. It is quite possible that we may see different rates of LTT when it comes into force on 1 April 2018.
If you would like any further information about this update, please contact a member of our Tax Team.
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