Scottish residential property market: Easter update and the government-backed 5% deposit scheme

With the Land and Buildings Transaction Tax (LBTT) threshold returning to pre-pandemic levels, prospective buyers in Scotland should consider whether this is a good time to buy, write Greig Honeyman and Phil Harris, of our residential property team.

31 March 2021

In a recent article we discussed how, following the COVID-19 pandemic halting the Scottish residential property market for the first time in living memory, the market had experienced a resurgence, with many properties in Edinburgh and Glasgow selling at closing dates with prices 10% - 20% above Home Report valuation. This resurgence has continued through the first quarter of 2021, but with the Land and Buildings Transaction Tax (LBTT) threshold now dropping back to pre-pandemic levels prospective buyers should consider whether this is a good time to buy.

Is this a good time to buy?

This remains a difficult question to answer as we continue to live in unprecedented times. One the one hand it, could be argued that the current market operates in an artificially inflated bubble and we may still see a reduction in prices in the coming months. However, with an unpredictable stock market we have so far continued to see growth in property investment, particularly from overseas investors in Edinburgh. Any reduction in prices could therefore be short lived. The lack of property stock continues to add to the sellers’ market we are experiencing.

One recent piece of news that may also keep the market buoyant was delivered by Chancellor Rishi Sunak during his recent Budget statement where he unveiled a new UK Government-backed 5% mortgage scheme. The scheme will enable lenders to offer more deals to homebuyers with a low deposit or limited equity, and is designed to help those with a 5% deposit obtain a mortgage with the government backing part of the loan.

Under the scheme, first-time buyers, home movers and previous homeowners with a 5% deposit will once again have access to 95% loan-to-value mortgages. These are lending criteria which have generally not been available since before the banking crisis as far back as 2008/9.

For a purchaser there will be no discernible difference between a 95% mortgage offered through the government scheme and a 95% mortgage offered outside this scheme. However for the mortgage lender, the scheme guarantees that the government will meet part of the cost if the borrower defaults on repayments and the lender loses money. This should result in the scheme being popular with high street lenders and purchasers alike.

The scheme is scheduled to run until the end of 2022 and so should have a big impact on the first time buyers’ end of the market with a resultant knock-on effect on the rest of the residential market.

What taxes am I currently liable to pay on a property purchase?

Any properties purchased after 31 March 2021 will be liable to the pre-pandemic rates of tax, with the lower LBTT band returning to £145,000 from £250,000. This means that purchasers will pay LBTT on property purchases on an increasing sliding scale starting at £145,000. A link to the Scottish Government’s LBTT calculator is here.

What is Land and Buildings Transaction Tax (LBTT)?

LBTT is a tax that may be applicable when buying a residential property or piece of land in Scotland (previously known as Stamp Duty).

If you are buying your main property after 31 March 2021, you will pay no LBTT on a property costing up to £145,000. This will apply whether you’re a first-time buyer or if you have owned a property before. Properties costing more than £145,000 will incur LBTT on a sliding scale based on the value of the property.

If you’re buying a second home, you may also need to pay an Additional Dwelling Supplement (ADS) of 4% based on the total purchase price of properties costing more than £40,000.

What is Additional Dwelling Supplement (ADS)?

ADS is a Land and Buildings Transaction Tax on second homes.

Buyers of additional residential properties, such as second homes, will have to pay an extra 4% on the total purchase price of properties costing more than £40,000.

Due to the increase in the starting threshold and where the ADS does apply, the change to the starting threshold will also apply to property transactions. This means that a residential property transaction that is liable to the ADS will not pay the standard rates of LBTT on the first £250,000 of the purchase, however the ADS will remain payable at 4% of the total purchase price.

What should I do next?

If you are actively watching the market or considering investing in residential property in Scotland we recommend you get in touch as soon as possible to discuss your situation, as many properties are selling within a matter of days of being marketed (particularly across the central belt in Glasgow and Edinburgh). We would also be delighted to answer any other questions you have on the purchase process.

The primary contacts in our residential property team are Greig Honeyman, Partner, and Phil Harris, Senior Associate.