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Since the Welsh National Assembly came into existence in 2011, the Welsh Government were devoid of any powers to raise its own taxes. This power still rested with those in Westminster in antithesis to the rallying cry of the American revolutionaries for “No taxation without representation.” However, while demands for devolution have historically been weaker in Wales than in Scotland, the 2014 Wales Act gave the Welsh government tax-raising powers for the first time, enabling Wales to catch up with Scotland somewhat.

This is now being mirrored in the latest changes to property tax in Wales, which has seen the country overhaul its system, much like Scotland did in 2015. So, at the beginning of April 2018, the Welsh Government introduced the Land Transaction Tax (LTT), which together with a landfill tax are the first Welsh national taxes for 800 years.

The new Land Transaction Tax (LTT) has now replaced Stamp Duty Land Tax (SDLT) in Wales and it applies to both residential and commercial property. The tiers are structured similar to that of SDLT, however, the new thresholds separating each tier have increased the progressive nature of the taxation, lessening the tax burden when buying lower-value homes and increasing the amount paid on more expensive purchases. So, how does this new property tax work and what impact will it have on the residential and commercial sector in Wales?

By increasing the initial LTT threshold to £180,000, the Welsh Government believes that the average first time buyer in Wales will pay no LTT. According to the devolved administration, it will leave 95% of purchasers paying the same amount or less tax than before, although the remaining 5% of buyers will have to pay a greater amount of tax.

The figures support this too. With the average house price in Wales £153,034, an average homebuyer who would have previously paid £560 in SDLT now pays nothing under LTT. Even in Monmouthshire, Wales’s most expensive region, with average prices of £245,080, buyers will still make savings with LTT compared to SDLT, paying £124 less in tax on average.

But while it looks like the average homebuyer in Wales will benefit, the same cannot be said for the buy to let and high-end market. Purchasers of homes with one property or more are still faced with a 3% surcharge as per SDLT in England and Northern Ireland. This, combined with the new tiers, means that buyers of a £1m Welsh second home are now faced with LTT charge of £91,250, instead of £73,750 of SDLT. Where sales are over £2m, the differences are even more stark, with the tax requirement rising from £213,750 to £258,350.

[Land Transaction Tax and Stamp Duty Land Tax (England and Northern Ireland) compared]

Land transaction tax (LTT) Wales Residential Property

Threshold

%

£0 to £180,000 0%
£180,000 to £250,000 3.50%
£250,000 to £400,000 5.00%
£400,000 to £750,000 7.50%
£750,000 to £1.5m 10.00%
£1.5m+ 12.00%

SDLT – England and Northern Ireland Residential Property

Threshold

%

£0 to £125,000 0%
£125,000 to £250,000 2.50%
£250,000 to £925,000 5.00%
£925,000 to £1.5m 10.00%
£1.5m+ 12.00%

Land transaction tax (LTT) Wales Commercial Property

Price band

LTT rate

SDLT

£0 to £150,000 0% 0%
£150,001 to £250,000 1% 2%
£250,001 to £1m 5% 5%
£1m+ 6% 5%

For the commercial sector the changes under LTT are more significant. Of most concern is the difference in the top rate of LTT on commercial property transactions of £1m and above, with LTT increasing the rate by 1% from 5% of the SDLT rate to 6%.

The volume of deals at £1m or above is significant, representing 79% of Welsh commercial deals, while deals of more than £10m comprise close to a quarter of commercial property transactions in Wales. These include key projects that have helped kick start regeneration and boosted employment, such as Swansea University Bay Campus at £87.3m and the UK Government’s Property Unit at Central Square at £117.2m.

The property sector is a global market where there are few international boundaries for investment and where national governments actively compete to attract funds. The proposition for inward investment has to be competitive and it must be attractive to investors. There are fears that LTT will act as a deterrent for investors, which directly conflicts with the Welsh Government’s policy to attract inward investment to promote economic growth and prosperity.

To illustrate the impact, Allsop’s national investment team sold ‘Project Wildcat’ in June 2017 which comprised six industrial units, a hotel and leisure park spread across South Wales for a combined price of £33.4m. Purchaser costs for this transaction at the time stood at circa £2.26m providing a return of 8.5% (NIY). If the portfolio was sold today however, for the same price, an investor would incur additional costs of circa £320,000 due to the new tax changes, reducing its return to circa 8.42% (NIY).

Whilst it may be a deterrent to some, we consider that the majority of investors will remain in the market for Welsh properties but will adjust their bids on commercial and residential investment properties accordingly to ensure they still receive the desired net yields. So, for the above example, the investor would most likely adjust their bid downwards to ensure a return of 8.50% is realised. As such, landlords are likely to feel the brunt of the new LTT changes as investors may dampen their bids going forward to maintain a good yield.

This new tax regime offers mixed fortunes for those in the sector, with perhaps residential owner occupiers benefiting the most. Prices may be forced to adjust in the Welsh commercial sector, temporarily dampening the market. In the longer-term, appetite for good quality investment opportunities is likely to prevail, sustaining existing levels of investment.


Notes to editor

Gareth is an associate in the Commercial Valuation team. He specialises in valuing properties for loan security, accounts and purchase purposes.  He carries out both individual and portfolio valuations of a range of assets from mixed use schemes to solely commercial properties including retail, office and industrial.  Gareth has a particular focus on the valuation of retail and residential mixed use properties.

The posts on this blog are provided ‘as is’ with no warranties and confer no rights. The opinions expressed are the author’s own and do not necessarily represent those of their employer.

Contact

If you would like to get in touch with Gareth, please contact him:

gareth.hosgood@allsop.co.uk or 020 7543 6757