Jeff Salway: Scots eye Swinney’s response to Osborne

2 Scotlands successor to stamp duty, the land and buildings transaction tax, has raised less cash than had been forecast. Picture: Alex Hewitt

Scotland’s new system of property tax could be in line for an early overhaul as Holyrood prepares to follow up the Autumn Statement set out by George Osborne on Wednesday

Finance secretary John Swinney will present the Scottish draft Budget for 2016-17 on 16 December, in an announcement held back so that Osborne’s plans could be taken into account.

Those plans included several measures that will have little or no impact on taxpayers in Scotland. The additional powers given to local authorities for social care funding apply only to England, while buy-to-let landlords and second home owners north of the Border won’t be hit by the 3 per cent stamp duty increase facing those elsewhere in the UK.

The plans published by Swinney next month, ahead of the April introduction of the Scottish rate of income tax, could therefore be of far greater significance to taxpayers in Scotland.

David Glen, head of tax at PwC in Scotland: said: “As devolution gathers place, it is becoming increasingly apparent that Scots need answers from both the UK and Scottish budgets if they are to truly understand the full impact on their household incomes.

“This includes immediate questions such as: How much will I pay in council tax, how much will I pay in income tax and how much will it cost me to buy a house?”

Swinney’s plans are expected to feature a spending squeeze in areas including local government, care and employment, following the announcement of cuts to the Scottish block grant.

The Scottish Government is also expected to give its first announcement on the Scottish rate of income tax. Under changes taking effect from April, the income tax rates set by Westminster will be reduced by 10p in the pound for Scotland, leaving the Scottish Government to set its own rate to generate its own income.

The Scottish rate could be set at 10p, leaving income tax unchanged, but there is no upper limit on the rate and it could also be cut to zero (although earnings bands will remain the same across the UK in the 2016-17 tax year).

“While it is generally expected that the Scottish finance minister, John Swinney, will keep rates as they currently are in the UK, this is just a foretaste of potential changes to come from 2017 when we anticipate that both rates and bands will diverge from the UK,” said Glen.

The draft Budget may also offer hints as to the shape of changes to Holyrood’s policy on council tax - which has been frozen since 2008-9 – or even a more wide-ranging reform of the system.

“Council tax payers in England discovered their bills may increase by up to 2 per cent to pay for social care.

But we’re not immune in Scotland – far-reaching changes may also be revealed following the imminent report of the Commission on Local Tax Reform,” said Glen.

“At the very least, changes to the council tax bands can be expected but we may see a commitment to an entirely new tax based either on income or land values.”

Those announcements are more likely to form part of the SNP’s manifesto for the 2016 Holyrood elections, however.

More realistic is some alteration to land and buildings transaction tax (LBTT), according to Jason Hemmings, partner at Cornerstone Asset Management.

“It’s hard to imagine Mr Swinney ending the council tax freeze before May’s Scottish Parliament elections. Instead, he’s likely to make changes to LBTT after being warned it would bring in less than predicted,” said Hemmings.

Under the Scottish version of stamp duty, which took effect in April, there’s no tax on transactions below £145,000 (compared to £125,000 previously). A marginal tax of 2 per cent is charged between £145,001 and £250,000 and there’s a 5 per cent levy between £250,001 and £325,000.

A 10 per cent charge applies between £325,001 and £750,000 and there’s a 12 per cent marginal rate above that level.

The Autumn Statement saw the Chancellor introduce an extra 3 per cent rate of stamp duty for buy-to-let landlords and second-home owners from next April. This will apply only to properties in Scotland and Wales, but there have been calls for Holyrood to follow suit.

“He may feel that this is not such a distorting factor in the Scottish property market – or he may feel that it fits well with one of his principles for tax policy: that it should follow ability to pay,” said Glen.

Either way, the Autumn Statement has underlined the extent to which taxpayers in Scotland must now wait until the Scottish Government sets out its own spending and tax plans.

“With three UK Budgets completed this year, perhaps the most revealing of all for Scots is yet to come,” said Glen.