In Scotland the giant stool of external influences on tax currently has three formidable legs. The first leg is Brexit – though after years of dominating discussions, the direct effect on property taxes in Scotland has, to date, been minimal. The second leg - the changes ultimately deriving from Covid 19 -is likely for the most part to be for the future, with tax increases almost inevitable, and the lure of land as a source for tax no doubt attractive. That certainly applies to the third external influence on the tax system, devolution and a renewed drive for independence. In the short term, Covid brought some very minor and currently time-limited reliefs, in an attempt to preserve the market in housing. In the longer term, all three legs (to which can be added of course simple UK and Scottish tax needs to make some inroads into unprecedented deficits and borrowing) seem certain to drive the need for higher taxes, perhaps with increased progressivity.

Over the last year, there have been a large number of proposals and suggestions made by various bodies, the implementation of many of which would have significant effects on the UK and/or Scottish taxation of land in particular.

Wealth Tax

Perhaps the greatest effect would come from the introduction of a wealth tax, as formally proposed by the Wealth Tax Commission. This essentially private body produced a detailed final report, A Wealth Tax for the UK, published on 9 December 2020. Its conclusions and model set out will certainly attract attention, not least because a one-off wealth tax at 5% (albeit collected over five years) is estimated to raise some £260 billion. If this is a kite being flown, it is a gold-plated one. Little official notice has been taken of this as yet.

Inheritance Tax

The Office of Tax Simplification (OTS) has more official standing. At the request of the Chancellor, it has been looking at inheritance tax for some years. Some two years after the publication of its first report on IHT, and a year after the publication of its second report on the tax, the suggestions put forward continue to have resonance and if there is to be significant reform of capital taxes, these reports provide much on which to draw. While little in these reports is directed specifically at land (with the exception of possible reform of agricultural property relief from inheritance tax), land is again an immoveable (and thus difficult to avoid) source for the tax.

Capital Gains Tax

Inheritance tax interacts with capital gains tax, notably because of the tax-free uplift for the latter which occurs on death. This may be considered less desirable where inheritance tax is not actually paid on a death. This issue was considered to some extent in the OTS’s second IHT report. In July 2020, the Chancellor requested the OTS to review capital gains tax; and their first report on this tax, on policy design and principles, was published in November 2020. A second one followed , on key technical and administrative issues. Again, the impact on land is not exclusive to that asset, although it is among the assets most commonly affected by the tax (and at present has higher rates of tax for residential property).

It can be seen from all this that the stars may be aligning for a wholesale reform of capital taxes – and raising the tax burden on capital may well be considered less economically disruptive than income tax increases.

Scottish Land Commission

More direct proposals on taxation of Scottish land are found in a new paper from that prolific source, the Scottish Land Commission. Land and property taxation in Scotland: Initial scoping of options for reform was published in December 2020.

The report explores tax instruments relating to land, taking the view that tax policies and direct measures can contribute to certain key land reform policies, including more diverse land ownership, reducing the number of vacant and derelict sites, expanding agricultural tenancies and joint-venture farming, and expanding the supply of land for new housing. The report acknowledges that, under a partially devolved tax system, not all tax measures are available as economic instruments; and concludes by recommending further analysis of a range of possible tax changes. Specific examples include corporation tax super-deductions for development expenditure; business rate or council tax reductions for redevelopment activities; increased taxes on unproductive land; the removal or reduction of agricultural property relief for inheritance tax; adding agricultural land to the valuation roll for business rates; reforming council tax bands to make the structure more progressive; and (continuing a theme which has proved persistent and thought to be more comprehensively effective than other suggestions) implementing a land value tax on concentrated private estates. The Commission has established an Expert Advisory Group on Tax on Land and Property; this will help shape recommendations the Commission intends to put to Scottish Government in late 2021.

Land reform has always been close to the present Scottish Government’s heart; combining it with new necessities in taxation may prove a particularly attractive match.


Alan Barr