A warning to Scotland: 'Tax competition' matters

The Scottish government’s first use of a devolved tax was quickly revised, after being undercut by tax competition from the rest of the UK.

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It will cost you more in tax to buy an expensive house in Scotland than in the rest of UK

Today, the Scottish government revised its new Land and Building Transaction Tax (LBTT) rules.

The LBTT is to replace stamp duty in Scotland from April, and its rates had been designed to be oddly punitive for those buying high-end houses. Anyone buying a house costing more than £250,000 was to pay stamp duty at 10%. For houses over £1m, the rate jumped to 12%.

The only good news in it was that each rate was only paid in its band, rather than on the entire price, as was the case with UK stamp duty. However, in December, George Osborne stepped in and changed stamp duty in the UK.

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He also removed the old slab system we all hated, and introduced new rates. But his were rather lower: 10% above £925,000 and 12% above £1,500,000. Scotland suddenly looked pretty bad. Its first use of a devolved tax sent a nasty message to the well off.

An example: those purchasing a house worth £510,000 would pay £28,300 in LBTT, compared to just £15,500 under the new stamp duty. That's a difference of 83%. That, as estate agent Rettie & Co put it, is the kind of thing that has a marked effect on things such as "house builders' decisions on where to build; employers' decisions on where to locate; and families' decisions on where to live".

So the SNP changed its mind: 10% now doesn't kick in until £325,000, and a new 5% rate has been introduced between £250,000 and £350,000. It is still going to cost you more in tax to buy an expensive house in Scotland than in the UK, just not as much as it might have.

The lesson is one that those calling for tax policy in Scotland to be very different to that in the UK (a much higher top rate of income tax for example) might want to pay attention too: when borders are close and open, tax competition matters.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.