The biggest impact of LBTT has been felt above £750,000, where the number of residential transactions is 7% lower than the level during the year ending June 2014, when the previous structure was in force. The market above £1 million, which had briefly adjusted to the higher rates, is also seeing relatively lower levels of activity this year.

Revenue generated

LBTT did not perform in its first tax year 2015-16, generating residential revenues of £202 million, against a target of £235 million. However, the start of the Additional Dwelling Supplement (ADS) in April 2016 has boosted revenues, generating £85 million of the total £299 million in the tax year 2016-17. This was £19 million short of the £318 million target. Without ADS, the basic LBTT revenue in 2016-17 was actually lower than the previous structure in 2013-14. So far in the current tax year 2017-18, LBTT has generated almost £94 million in revenue in three months, with an annual target of £283 million.

The future of LBTT

The sustainability of LBTT revenue under its current structure depends on the market above £325,000 and Edinburgh City. The tax yielded from transactions above £325,000 totalled 72% of LBTT revenue (excluding ADS) over the past 12 months. Edinburgh City alone generated 37% of this revenue; so clearly, LBTT needs a growing Edinburgh residential market to underpin revenues. Our research shows a slowdown in transactions and fewer properties being launched onto the market in Edinburgh, upon which LBTT is reliant.

The Scottish Government has set itself ambitious LBTT residential targets, ranging from £310 million in 2018-19 to £362 million in 2021-22. Such levels are unlikely to be achieved unless there is a change in rates that can stimulate the lucrative market above £750,000 and also maximise revenue from the wider market.