Blog: Taxing problems in Edinburgh’s property market



Martin Campbell

Martin Campbell looks at whether tax measures have had their intended effect in Edinburgh.

The Edinburgh residential property market is currently outperforming the rest of the UK’S top 20 cities. 2017 saw an average increase in prices of 8.2 per cent (Hometrack UK). Demand for residential property in central Edinburgh has been fuelled by its global popularity as a year-round tourist destination and its desirability as a place to live and work. Edinburgh recently ranked second (to Wellington, New Zealand) as the best place to live for quality of life in a Deutsche Bank report.

The ever-growing demand for residential property in central Edinburgh has, unsurprisingly, made it an attractive investment proposition for residential property investors with the winning combination of relatively good value (when compared to, for example, London), capital growth and an almost guaranteed rental income stream.

This has resulted in homeowners retaining properties for longer, increasing numbers of professional landlords with property portfolios and overseas investment. This prompts the question, is the capital becoming a victim of its own success with local residents being priced out of living in central Edinburgh?

There has been an unprecedented growth in the ‘sharing economy’ for short-term residential property lets. The marketleading online platform Airbnb currently lists over 8,000 Edinburgh homes, with 60 per centplus being for the entire property.

Both the UK and Scottish governments have been turning the spotlight on the tax treatment of buy-to-let properties. The property tax system is becoming increasingly pervasive as both governments seek to increase tax revenue, slow down the property market and encourage wider property ownership. Are these measures hitting their intended targets and taking any of the air out of the buoyant market?

Two of the most prominent property tax measures implemented in recent years have been the introduction in Scotland of the land and buildings transaction tax (LBTT) ‘additional dwelling supplement’ (ADS) charge and restrictions on income tax relief for interest paid on borrowings of residential landlords.

A 3 per cent ADS charge has applied since 1 April 2016 on the acquisition of ‘additional residential properties’ on transactions with a value over £40,000. The purchase of buy-to-let properties, holiday homes or student accommodation for children are all potentially caught by this charge, which is levied in addition to the normal rates of LBTT applied to the purchase price. There would, for example, be an additional £6,000 ADS charge on the purchase of a buy-to-let property for £200,000 where a family home is already owned.

Professional landlords will now, at the very least, have to factor in this cost. unfortunately, a number of first-time buyers will also find themselves being caught by the ADS charge where, for example, they have previously inherited a part-interest in are la tive’ s property, are the beneficiary of a family trust or simply as a result of their personal circumstances.

It used to be the case that landlords could claim a full income tax deduction for allowable finance costs (eg mortgage loan interest, arrangement fees, repayment fees, e tc) relating to buy-to-let residential property. The UK government introduced new rules with effect from 6 April 2017 restricting the tax relief on all allowable finance costs to the basic rate of income tax (currently 20 per cent) for landlords subject to the higher rates of income tax by 6 april 2021. These new rules are being phased in over four years.

This income tax relief restriction does not, however, apply to short-term furnished holiday lets (‘FHL’). In order to qualify, the FHL business must be carried on commercially, with a view to profit. It must be available for short-term commercial letting to the public as holiday accommodation, and it must actually be let for a certain number of days each tax year. Short-term lets promoted by the “sharing economy” may therefore become even more attractive to those relying upon borrowings to finance their residential property portfolios.

It appears that recent property tax measures have so far failed to take the air out of the buoyant Edinburgh residential property market. Indeed, in certain cases the ever-changing property tax landscape could be seen to have made it more difficult and complex for first-time buyers to get on the property ladder.



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