After some divergence in recent years caused in part by the Covid-19 pandemic, but also by frequent changes in UK Governments, the Scottish Budget maintained its regular timing slot when introduced on 4 December 2024, some five weeks after its UK equivalent on 30 October. This pattern allows some time for reaction in the Scottish Budget; quite crucial in a partially devolved tax system. This Budget was delivered by the SNP as a minority government. The SNP is two seats short of an overall majority at Holyrood, so the Budget will require at least some cross-party support to be passed.In terms of the major taxes (principally income tax) and whether or not in response to Scotland’s share of the tax increases in the UK Budget, the reaction was one of making limited changes. This is in marked contrast to recent years – last year alone brought a brand-new tax band (‘advanced’), bringing a rate of 45% for those with affected income above £75,000; and an increase in the top rate (above £125,140) to 48%. However, this year there was a sting in the tail announced for those purchasing second homes or buy-to-lets in Scotland, with a rise of 2% to 8% in the Additional Dwelling Supplement to Land and Buildings Transaction Tax (Scottish stamp duty, colloquially).
In recent years, the Scottish Government has presented a plethora of plans, approaches and frameworks for Scottish taxation, but accompanying this Budget was the big one – its publication delayed from earlier in the year – Scotland’s Tax Strategy: Building on our Tax Principles. This document is very much an a la carte menu of possibilities, rather than a compulsory table d’hote, but if even some of the possibilities come to fruition, those paying Scottish taxes – a broader category than Scottish taxpayers – will find their tax burden rising further.
Income tax
Turning to those Scottish taxpayers, the main differentiated tax, compared to the rest of the UK (and the main source of directly raised tax revenue for the Scottish Government), is income tax. Being only partially devolved, the Scottish Parliament can set rates and thresholds as they affect only non-savings and non-dividend income; other rules, structures and reliefs (including the level of personal allowance) remain controlled by the UK Government, as does national insurance, so crucial in the overall picture for the immediate future. With recent changes, there are now six bands of Scottish income tax.
There is proposed for 2025-26 a 3.5% increase (about twice the rate of inflation) in the basic and intermediate rate thresholds, to £15,397 and £27,491 respectively; and it was confirmed that these two thresholds will rise by at least the rate of inflation for the rest of this Parliament. The remaining thresholds will be maintained at their current levels. As a consequence of these increases, a Scottish taxpayer pays less tax (but not much less tax) than those in the rest of the UK, if their relevant Scottish income is £30,317 or less.
The complete table of proposed rates and thresholds for 2025/26 is as follows (assuming a personal allowance (set by the UK Parliament) of £12,570):
There was also confirmation that there would be no increase in the number of tax bands or the rates of tax on these bands, not only for 2025/26, but also for the remainder of this Scottish Parliament (effectively one further tax year). But there was no such freezing confirmed for the third pillar of change available to a Scottish Government, the thresholds at which the rates commence. So some flexibility remains.
The lack of change at the upper levels means that fiscal drag will continue to pull more Scottish taxpayers into the higher rates. The combination of the Scottish rates with the (UK) withdrawal of the personal allowance for incomes above £100,000 means that for affected Scottish taxpayers, the slice of income between £100,000 and £125,140 remains subject to income tax at 67.5%, often with 2% NICs payable in addition. The attractiveness of increased income subject to that level of tax remains questionable.
Increase in Additional Dwelling Supplement (ADS)
The ADS, the Scottish equivalent to the SDLT Higher Rates for Additional Dwellings (HRAD), was increased from 6% to 8% for purchases with an effective date on or after 5 December 2024. The old rates apply where missives were concluded (a contract was entered into) on or before Scottish Budget Day (Wednesday 4 December). The ADS increase was not unexpected following the increase in HRAD from 3% to 5% announced in the UK Autumn Budget, but it brings the top rate of LBTT/ADS on residential property purchases in Scotland to 20%. By way of example, the total LBTT on the purchase of a buy-to-let property for £200,000 is now £17,100, of which £16,000 is the ADS.
The Scottish Government has committed to carrying out a review of LBTT over the remainder of this Parliament.
The review will commence in Spring 2025 and will consider various aspects of the residential and non-residential arrangements for LBTT. A similar consultation carried out in respect of Stamp Duty Land Tax (SDLT) between 2021 and 2024, resulted in SDLT Multiple Dwellings Relief (MDR) being cancelled. MDR is still available for LBTT, but this is likely to be one of the issues considered. Other areas could include the treatment of ‘mixed purchases’ – where a purchase includes non-residential property, LBTT is payable at the much lower non-residential rates. An apportionment approach could give fairer results, i.e. where LBTT is paid at the residential rates on the price attributable to residential property, and at the non-residential rates on non-residential property. ADS is already payable on the price attributable to residential property, so the concept of apportionment is already familiar in Scotland.
Despite a significant number of changes to the ADS earlier this year, there are still aspects which are challenging and cause outcomes which may appear to be unfair. The review will further explore the impact of the ADS where exceptional circumstances or events occur.
LBTT reliefs for CoACS and PAIFs
The investment community will be delighted to hear that the Scottish Government intends to consult in early 2025 on draft legislation to provide a relief from LBTT on the exchange of units within Co-ownership Authorised Contractual Schemes (CoACS). This will allow funds set up as CoACS to invest in Scottish property which is not possible currently, because of the LBTT charges that can arise.
The Scottish Government will also consult to seek views on the case for introducing an LBTT seeding relief for the contribution of initial properties into Property Authorised Investment Funds (PAIFs) and CoACS, similar to the seeding relief which already exists for SDLT.
LBTT: other administrative changes
In 2018 the LBTT group relief provisions were amended by The Land and Buildings Transaction Tax (Group Relief Modification) (Scotland) Order 2018 to allow LBTT group relief where Scottish share pledges had been granted to a bank. This change only applied to transactions with an effective date on or after 30 June 2018. The Scottish Government undertook to amend the LBTT legislation to give retrospective effect to the change and this has now been done – see s 57A of the Aggregates Tax and Devolved Taxes Administration (Scotland) Act 2024.
The Scottish Government has confirmed that, in early 2025, legislation will be laid before the Scottish Parliament to address some other LBTT issues which have been under discussion. These include clarifying that the five year time period for development under LBTT sub-sale development relief runs from the date the purchase of land by the sub-purchaser completes, rather than the date the onward sale contract to the sub-purchaser is entered into. A further change will provide for the availability of LBTT group relief in non-partition demergers. As there is currently no annual Finance Bill process in Scotland, these changes are very welcome.
LBTT Green Freeports Relief
No announcement was made about extending the time limit for the LBTT Green Freeports Relief from five years to 10 years, in line with the increase in the time limits for the other UK tax reliefs. Although the Scottish Government has confirmed that it agrees to extend the window for the LBTT relief from 2029 to 2034, this has not yet happened. It would be helpful if the Scottish Government could change the sunset date for the LBTT relief as the shorter, five year time period has been accepted as being too short to allow for strategic planning. It would also align the time limits with the time limits for the UK tax reliefs, to avoid confusion for taxpayers.
Scotland’s tax strategy: Building on our tax principles
This document commences with an aspiration to certainty, which is necessarily circumscribed not only by the extent of UK reserved tax powers (which is noted), but also of course by the possibility that this Scottish Government will not be in power long enough to implement the principles outlined. It notes that fiscal choices on income tax already taken will apparently raise £1.7bn more in 2025/26 than would have been the case if UK tax developments had remained unchanged.
The freezing of the number of bands and the rates of Scottish income tax are mentioned as a pointer towards stability. A further promise is made to examine possible reform of council tax and non-domestic rates.
While there is an aspiration to grow the tax base, the Scottish Government’s fiscal underwear starts to show at this point, as this is in order to maximise potential income tax and other tax revenues. Remaining devolved taxes – Scottish Aggregates Tax and Air Departure Tax – are to be fully introduced, along with a Scottish Building Safety Levy, and there is a desire for further tax devolution. The legislative process for Scottish taxes is to be re-examined, reviving the possibility of a regular Scottish Finance Act.
There is mention of the balance of tax across labour, income and wealth, as well as a specific mention of land and property taxation. There is to be an exploration of ‘what wealth taxation could look like for Scotland’.
All of this may sound a little like ‘more please’ and thus threatening to a category of people becoming as familiar as those who used to ride on the Clapham omnibus (‘those with the broadest shoulders’). Those creatures are the ones who can bear the burden of somewhat more tax in a more progressive tax system than in the remainder of the UK. Reliance on those with such broad shoulders forms a perennial balancing act for a Scottish Government, as at least some of them may take their broad shoulders – and most of the tax revenues they support – elsewhere.
Contributors
Partner
Director of Corporate Tax
