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Institutional investors are pressing the Scottish government to reform the country’s “inequitable” equivalent of stamp duty, which they say could generate growth by unlocking billions of pounds of capital into property.
Ahead of the Scottish Budget on December 4, asset managers say they are choosing not to invest in Scotland because of the lack of relief from land and buildings transaction tax (LBTT), the Scottish equivalent of stamp duty, on some collective investment funds.
Abrdn, an Edinburgh-based UK asset manager, said the current rules made it “practically unworkable” for such schemes to own Scottish property, leading to a “range of voices” calling for the removal of this “disincentive”.
“We would welcome any move to introduce reliefs that would remove the distortive effect on investment decisions when comparing Scottish and English property,” a spokesperson said.
While such relief for stamp duty land tax has been granted in England, it has not been introduced in Scotland, despite a consultation in 2018 that decided the move would have been advantageous. As a result, billions of potential investments — especially into commercial property — have been left on the sidelines, investors said.
During that time, the Scottish government had been “contending with” a number of tax issues, said Scotland’s deputy first minister Kate Forbes, adding that the country’ tax position would be outlined in the Budget.
When pooling Scottish real estate assets into Co-ownership authorised contractual schemes, or CoACS, the properties are subject to LBTT, whereas HM Revenue & Customs provides relief on stamp duty in England.
These schemes allow large investors to invest collectively while still benefiting from reduced rates of withholding tax.
Transactions, such as a subscription or redemption, are subject to LBTT, which is applied to every Scottish property within the pooled fund, creating a significant administrative burden for small amounts of money.
“There are several large investors who simply won’t invest in Scotland due to the inequitable tax regime,” said one pension fund executive. “If the Scottish government equalises the rules, you would anticipate a significant investment in real estate.”
The executive said their England-based, £5bn fund alone would hope to invest up to 8-10 per cent north of the border. “Should the rules change, it opens up a potential £500mn investment in Scottish property,” they noted.
Camilla Spielman, a legal director at Eversheds Sutherland, said the lack of relief has had a painful impact on some institutional investors with Scottish property. New funds were generally recommended not to buy Scottish property, she added.
“If this [tax issue] isn’t solved, these funds won’t want to invest,” she said. “This is a self-inflicted wound — all it would take to fix it is to match the current policy in England.”
The Scottish Property Federation’s David Melhuish, who met Forbes in September to outline the case for equalisation of tax relief, said the prospects for change looked “positive” for the first half of next year.
Forbes, who has taken on a mandate as the government’s “investment champion”, last week said she was “listening carefully” to institutional investors.
“We are determined to ensure Scotland remains a competitive environment,” she said.
