Cabinet Secretary for Finance & the Constitution
The Scottish Government
St Andrew’s House, Regent Road
Edinburgh EH1 3AD
9December2016
Dear Cabinet Secretary
As you finalise your first Scottish Budget, I write to you with a brief summary of 16 property industry proposals which we think would help to grow the economy, expand the tax base and ultimately support both our industry and the Scottish Government to deliver key objectives of increasing jobs and investment in Scotland.
The thrust of our views outlined in the Table below will not be news to you or your advisers in many regards. But I would like to preface this with some analysis of where the markets are currently. Commercial sales for investment suffered its fifth quarter of decline in Q3 (June to September 2016), suggesting a malaise which existed pre-Brexit although the uncertainty prevalent for investors since Brexit will clearly not have helped investment volumes.
The total value of all commercial sales in Scotland between July and September 2016 (Q3) fell to £636m. This is 22.3% down from Q2 2016 and 6.5% lower than in Q3 2015. Glasgow posted its lowest quarterly total sales value since Q2 (Apr-Jun) 2013. In Q3 the city saw £53.9m in sales of commercial property from 114 transactions, down 73% in both quarter-on-quarter and year-on-year comparisons. Although Glasgow is a positive city for development and investment, we are also alarmed to note that there is no speculative Grade A office development anticipated in the city until 2019 at the earliest. This underlines our concern and call for positive government actions, such as development rates relief, to support projects currently delayed through concerns over empty rates charges and to inspire confidence in the market.
As well as seeking to encourage you to introduce policies to support development, we would encourage you to support transactional activity in order to support economic activity and by extension, the government’s LBTT revenue. We believe both anecdotal and market evidence suggests that residential property transactional activity in the £325,000 to £750,000 range remains lower than we believe it would otherwise have been but for the 10% tax charge at this level. We believe if this threshold is raised to £500,000 it will release additional economic activity and revenues for the government.
Finally, we urge you to bring the large business supplement to support occupiers and move back into line with its equivalent in other parts of the UK to ensure we retain a competitive rates system. The overall rates burden has increased by some 70% since 2007 and it is fast becoming an unsustainable level of annual tax that is without respect to the economy which in cash terms has estimated to have grown by only 4% since this time. LBS adds significantly to this burden.
Key proposals
No / Proposal / Costs Implications1 / The poundage rate should be no greater than £0.50p including the large business supplement / Without reference to the new draft rateable values that the government has chosen not to publish thus far, we cannot make a firm estimate on costs. This figure is intended to be realistic however based on our best estimates of estimated valuation moves
2 / The large business supplement threshold must be increased to at least £50,000 rateable value / To retain competitiveness with England, particularly north England. Again, lack of new RV data means we cannot provide a firm estimate of cost implications.
3 / Business rates should not increase above CPI or 2% annually, whichever is lower / The government will seek to grow its rates revenue year on year
4 / New build or redeveloped commercial property should not be entered onto the valuation roll until first point of occupation or at least a year after completion, at which point if still vacant empty property rates relief should begin / This policy is aimed at encouraging ‘new entrants’ to the valuation roll so we see this as encouraging the expansion of the tax base with a gap of possibly a year for speculative development. Based on a small sample of members we estimate there is in excess of £1bn of commercially-led development where empty property rates are playing a role in undermining confidence to proceed with the development. If a change in policy can lead to this development coming forward earlier then it will help the expansion of tax base.
5 / Increase empty property rates relief levels – 90% rates after just 3 months is too much too fast - significant relief should be allowed for a up to a year and then reduce relief in phases / This will support new development and alleviate the threat of administration or demolitions – we are aware of a number of properties demolished since the loss of industrial rates relief for vacant stock
6 / Introduce three yearly revaluations for business properties / Some initial costs will be offset in time through fewer appeals and calls for transitional relief
7 / Do not introduce a one size fits all revenue neutral transitional rate relief system as has been done in England. / If transitional relief is introduced is should be upwards phased only and publicly supported. Costs – although TR schemes are intended to be self-financing they rarely are and therefore it would be sensible to target any such scheme at extreme cases of increase in rates liability or to support empty property relief reform.
8 / Retain vacant listed building rates relief / No change to existing known costs. The government needs to realise that listed properties will often require costly maintenance and stricter planning consents processes -any imposition of tax for vacant listed stock will therefore be a deterrent to investment in this critical sector
9 / Increase the residential LBTT 5% rate threshold to at least £500,000 / This is paid for by the significantly enhanced ADS revenue which is already more than double Scottish Government expectations. The Scottish Government made a preliminary estimate that this proposal would cost £32mn in evidence to the Finance Committee – ADS has already brought in a net £50.1mn in this finance year after just seven months. Improving the threshold as proposed would be a step towards a smoother LBTT system which will support increased transactions and indeed we believe enhanced tax revenue at this level in the longer term.
10 / Maintain the Non-domestic LBTT rates and thresholds for sales and leases as they are / With investment and sales volumes falling it is important to retain a positive differential with the prevailing SDLT rates on commercial property sales and leases in the rest of the UK
11 / Retain the exemption from the 3% additional dwelling supplement in order to attract large scale investors to the build to rent market in Scotland / This is a new market and the positive difference between LBTT and SDLT in this area is beginning to be noticed by investors – retain the exemption in order to attract transactions and development which will benefit revenue in the medium/long term.
The relief also supports smaller scale SME house-builders and new property entrepreneurs who may seek to purchase a relatively small number of units for the purpose of improvements and market sale.
12 / Earmark the additional planning fee resources for the benefit of the planning services in Scotland / This is additional revenue for Scottish planning services
13 / Introduce debt finance support for build to rent investment in Scotland in order to compete with similar support in England / We anticipate this as loan finance and therefore an extension of existing Scottish Government policy but earmarked for the new build to rent sector
14 / Explore joining and boosting the HCA - Lloyds Banking Group partnership designed to support SME house-builders into the housing market in Scotland / The Scottish Government is already seeking to support SME house-builders back into the market, we see this as a positive extension of that policy
15 / Do not introduce a Vacant, Derelict and Development Land Tax in Scotland / We believe such a tax would constrain house building and reduce land and property transactions
16 / Begin plans for a Council Tax revaluation and possible further alignment of bands beyond those identified in the government’s response to the Commission on Local Taxation. / We expect there would be a small net gain in council tax receipts following a revaluation
We would be pleased to explain our thoughts in greater detail at your convenience.
Yours sincerely
David Melhuish
Director
Scottish Property Federation
Tel 0131 220 6353