Land and Buildings Transaction Tax: review

Literature Review

• Strengths highlighted in the literature include LBTT’s progressive structure and the ability to target reliefs at specific market goals (e.g., first-time buyers, large-scale investment).
• LBTT faces specific criticisms around its complexity, market impacts, revenue volatility, and potential barriers to first-time buyers.
• Property transaction taxes are generally criticised as economically distortionary, reducing market mobility and housing transactions.
• Supplemental charges like ADS may reduce rental supply and pass costs to tenants through higher rents, according to economic commentary reviewed.

The following literature review draws on a range of perspectives and analyses relating to Scotland’s LBTT. It should be noted that to date, there has been only a limited number of studies specifically examining LBTT. Consequently, this literature review will also draw on evidence relating to SDLT in England and Northern Ireland, as well as land transaction taxes more broadly.

Strengths of LBTT

The literature highlights the effectiveness of LBTT as a progressive tax and in meeting the objective of vertical equity by ensuring that those with a greater ability to pay face higher tax rates (Alma Economics, 2020). This is achieved through a tiered structure in which the rate of LBTT depends on the property's value. For example, residential properties valued at less than £145,000 are exempt from LBTT, while higher-value properties are subject to progressively increasing tax rates, rising to as much as 12% on the portion of the price above £750,000 (The Land and Buildings Transaction Tax (Tax Rates and Tax Bands) (Scotland) Order 2015). Adam and Phillips (2025) observe that LBTT is more progressive than SDLT, which is applied in England and Northern Ireland. According to Borbely (2021), relative to SDLT, LBTT imposes equivalent effective tax rates on properties under £125,000, lower rates on those between £125,000 and £380,000, and higher rates on properties above £380,000, resulting in a more progressive tax structure. Borbely notes that implementing progressive rates for land transaction taxes can help reduce their distortionary effects and encourage greater activity among lower-value properties. He finds evidence of this following the Scottish introduction of LBTT, with significant increases in transaction activity at the lower end of the market, yet minimal impacts on the majority of properties subject to higher rates.

The literature has also identified potential benefits of the targeted reliefs associated with LBTT. The Scottish Government (2018a) emphasised that the increased zero tax threshold up to £175,000 meant that an estimated 80% of first-time buyers would not pay any LBTT, with other first-time buyers seeing savings of £600 in their tax payments. They note that the relief is expected to help 12,000 first-time buyers in Scotland every year. Furthermore, the ADS imposes a further tax applied to the purchase of additional residential properties, such as second homes and buy-to-rent properties. This likely incentivises owner-occupation through making it easier and more affordable for individuals to transition into owning their own home (Adam and Phillips, 2025).

The literature also highlights the significance of LBTT as a source of public revenue. In 2024-25, LBTT brought in £899 million in revenue according to statistics from Revenue Scotland (2025h). Recent forecasts by the Scottish Fiscal Commission (2025) project that LBTT revenues will surpass £1 billion in 2025-26 and will reach around £1.2 billion by 2029-30. Alma Economics (2020) also suggest that revenues obtained through LBTT are likely to have less distortionary effect on output compared to taxes on income or profits, as the LBTT tax base is not directly linked to Scottish output. Furthermore, LBTT can serve as an effective tool to stimulate property market transactions and, in turn, boost the wider economy through the use of stamp duty holidays. This approach was implemented during the COVID-19 pandemic by raising the LBTT payment threshold to £250,000, which meant that around 80% of buyers paid no LBTT at all (MacKenzie, 2020). A study from Best and Kleven (2017) on temporary transaction tax cuts finds evidence that temporary tax relief measures can trigger a significant expansion in economic activity, as buyers adjust the timing of their transactions to minimise tax liabilities. They find that removing a 1% property transaction tax in the UK led to a 20% short-run increase in activity in the housing market.

LBTT is also noted as improving on the original design of SDLT through incorporating a “slice” structure for tax thresholds. Mirrlees et al. (2011) observed that the slab structure of SDLT created highly distortionary incentives. Under the old SDLT structure, crossing into a higher threshold could result in a disproportionately large increase in tax liability, even from a small rise in transaction value. This created a sharp “cliff edge” effect, where a small increase in a property’s price could result in an extremely large increase in tax liability (Adam et al., 2025). In contrast, Borbely (2021) notes that LBTT’s slice-based design significantly reduces these distortions, leading to much less bunching of transactions just below threshold levels. It should be noted, however, that SDLT also moved to a slice structure in December 2014, shortly before the introduction of LBTT.

Criticisms of property transaction taxes

The literature search revealed a number of critiques directed not only at LBTT specifically, but also at the broader concept of land transaction taxes. Many economists have highlighted the inefficiency and distortionary impact of taxes on property transactions (McCauley, 2022). Taxes on property transactions can discourage mutually beneficial exchanges, distort the housing market, and deter homeowners from moving when they wish (Borbely, 2021; Tax Policy Associates, 2024). For example, the requirement to pay stamp duty when purchasing a new home may discourage older homeowners from selling and downsizing. This, in turn, reduces the supply of larger properties available for growing families who need more space (Scanlon et al., 2017; Johnson, 2023). Tax Policy Associates (2024) note that land transaction taxes can make it harder to secure bank loans due to the lost value to the tax, thereby limiting people's ability to move homes. The disincentivising effects of the tax can significantly influence property market transactions. Davidoff and Leigh (2013) examine stamp duty in the Australian housing market and find that a 10% increase in stamp duty leads to a 6% reduction in housing turnover when sustained over a three-year period.

This reduced mobility can, in turn, have further negative impacts on the labour market. Fewer geographically mobile workers means that people are unable to take up the jobs where they are most productive, resulting in lower labour market flexibility and an inefficient allocation of labour (Scanlon et al., 2017; Borbely, 2021; Cebr, 2020). In the rental market, taxes on property sales can reduce the supply of available rental properties, which in turn drives up rents for tenants. Johnson (2024) notes that recent rent increases can be partially attributed to higher tax liabilities faced by private landlords.

Cebr (2020) note that a reduction in the number of housing transactions and the resulting decline in labour mobility can have knock‑on effects that ultimately reduce the productive capacity of the economy as a whole. The Cebr study investigates the potential impact of making permanent an SDLT holiday introduced during the COVID‑19 pandemic. Their analysis suggests that extending the holiday would likely be fiscally neutral and could even be fiscally positive under their upper‑bound estimates. This is because the reduction in stamp duty during the holiday period is estimated to have led to an additional 37,000 property transactions, which in turn generated higher tax revenues through increased consumption and greater activity in the property market. In the context of the Canadian Land Transfer Tax, Han et al. (2022) examine the effects of property transaction taxation. They find that the tax significantly reduces overall housing transactions, increases the time properties are on the market, and distorts both rental and ownership markets. They estimate that these distortions due to the tax cause a deadweight loss of 79% of total tax revenue.

Criticism of land transaction taxes has prompted numerous calls for reform. The Mirrlees Review conducted a comprehensive examination of the UK tax system and put forward recommendations for reforms aimed at making the system more efficient. The review highlighted that land transaction taxes, such as SDLT, are particularly inefficient because they limit household mobility and prevent property from ending up in the hands of those who value it most. The review proposed replacing SDLT with a tax proportional to a property’s value, as part of wider reform of the taxation of housing consumption (Mirrlees et al., 2011). Several other studies have suggested shifting away from land transaction taxes in favour of alternatives, such as annual property taxes or land value taxes. Many economists argue that, in theory, these approaches are more efficient and create stronger incentives for the optimal use of land (Scanlon et al., 2017; Hughes et al., 2018).

Criticisms of LBTT

In addition to the critiques of land transaction taxes more generally, the literature review uncovered several concerns that relate specifically to LBTT.

The ADS, which imposes an amount of tax on transactions involving second homes or buy-to-let properties, in particular, has attracted criticism (Land Tax Advice, 2025). Adam and Phillips (2025) illustrate the considerable impact that the ADS has on landlords and tenants in the rental sector. They note that, for a property valued at £500,000, a prospective buy-to-let investor would incur £63,350 in LBTT, whereas an owner-occupier would pay only £23,350 for an equivalent purchase. In addition, landlords must also pay further taxes in the form of income tax on their rental income and capital gains tax on any increases in the value of their rental properties. They point out that by imposing an additional charge on purchases of rental properties, the ADS discourages transactions between landlords, making it harder for those wishing to sell to find buyers within the rental market. They argue that this affects not only landlords but also tenants, who are likely to face higher rents as a result of the ADS. The report also cites analysis from the Scottish Fiscal Commission, which found that the £30 million in additional annual revenue from the ADS rate increase is less than half of what could have been generated had buyers not been discouraged from making such purchases. Gibb and Leishman (2025) also criticise the lack of progressivity of the ADS and the high rates that apply to all transactions regardless of property value.

Other criticisms of the ADS have come from the Scottish Government (2023a) call for evidence, in which respondents noted a number of complexities and potentially unfair outcomes in relation to the current ADS. For example, it was noted that situations such as divorces and separations may result in individuals being liable to pay ADS on purchases that are intended to be their main residence. Respondents showed support for bringing in legislation that allows discretionary reliefs in exceptional circumstances that are out of taxpayers’ control. Furthermore, the call for evidence also highlighted potential complications when transactions are liable to both pay ADS, as well as get relief from the MDR, and uncertainty around how calculations should be applied in such cases. Moreover, the call for evidence indicated that, in some rural areas of Scotland, respondents felt it had not achieved its intended goal of reducing second-home ownership and short-term rentals.

Adam and Phillips (2025) highlight that fiscal drag has caused the scale of LBTT to increase steadily since its introduction. Since 2015, the tax thresholds of LBTT have remained unchanged. For example, the no-tax threshold has remained fixed at £145,000 since LBTT was introduced, with the only exception being the temporary relief provided during the pandemic. Since 2015, rising average house prices have pushed more properties into higher tax thresholds, resulting in a greater proportion of transactions being liable for LBTT payments. In 2015-16, just under half of properties were above the zero-tax threshold, but by 2023-24, this figure had increased to 64%. This shift indicates that the tax burden on property buyers has grown significantly over the period.

Gibb and Leishman (2025) provide an assessment of Scotland’s devolved housing taxes, including LBTT. They highlight the general concerns associated with land transaction taxes, such as reduced housing and labour mobility, as discussed above, but also identify issues that are more specific to LBTT. They observe that distortions in the housing market are exacerbated by the numerous exemptions and frequent changes to LBTT rates and reliefs. They also highlight the “bunching effects” in LBTT, noting how property transactions often cluster just below tax thresholds to avoid higher rates. Finally, they point out that LBTT revenues are particularly challenging to forecast for the Scottish Budget, as this requires estimating multiple factors, including transaction volumes, price distributions, and behavioural responses.

The literature also raises further concerns about land transaction taxes and their impact on first-time buyers. Although this evidence primarily concerns SDLT in England and Northern Ireland, the shared emphasis on supporting first-time buyers and the similarity of the first-time buyer reliefs mean it may also be relevant when assessing LBTT. Scanlon et al. (2017) argue that stamp duty in the English housing market can disadvantage first-time buyers by reducing housing turnover, thereby limiting the available supply of properties. Bolster (2011) evaluates the effect of SDLT first-time buyer relief and finds no significant improvement in housing affordability for first-time buyers. The study reports that the relief increased first-time buyer transactions by only 0.2%, with most beneficiaries likely to have purchased a property even in the absence of the relief. As such, the relief demonstrates weak additionality. As a result, the policy imposed a substantial fiscal cost, with the lost revenue to the Exchequer estimated at £160,000 for each additional first-time buyer transaction.