TAX rates are set to be at the heart of the Holyrood 2016 campaigns following a draft Scottish Budget that left key financial questions unanswered.
The continuation of the council tax freeze and a new charge for buy-to-let landlords and second home owners both featured in the measures set out by Finance Minister John Swinney on Wednesday.
However, the Scottish Government’s intentions for income tax bands and local taxation reform remain unclear. The decision to leave the Scottish rate of income tax unchanged was widely expected, though Swinney has been accused of missing an opportunity to back up the party’s claims to offer an alternative to austerity.
Wednesday’s Budget was the first to feature the new Scottish rate of income tax, under powers included in the Scotland Act (2012) and which take effect in April. The rate has for now been left in line with the rest of the UK, but it’s more likely to change when tax powers are devolved further in 2017.
“It’s likely that this will only be a one-year reprieve – when the long-awaited fiscal framework agreement is reached, we are likely to see both rates and bands diverge from the rest of the UK from April 2017 giving a more progressive outcome,” said David Glen, head of tax at PwC in Scotland.
There was an opportunity to diverge from the rest of the UK by leaving land and buildings transaction tax (LBTT) – the Scottish form of stamp duty – untouched. Swinney instead mirrored an increase imposed on buy-to-let landlords and second home owners in George Osborne’s autumn statement.
From April 2016 anyone buying an additional property in Scotland valued at more than £40,000 will be charged an extra 3 per cent on the purchase price, as well as LBTT.
“You would have to say that those who can afford to purchase properties for rent or to have a holiday home should also be able to afford a bit more LBTT,” said Barry Laurie, a tax partner at French Duncan Chartered Accountants.
“But, in view of his frustration over the Scottish rate of income tax, and not being able to hit high earners harder, why did Mr Swinney not make the increase in Scotland more than 3 per cent?”
The move is designed partly to take the heat out of a buy-to-let market boom singled out by the Bank of England last week as a threat to the UK’s financial stability.
Peter Gouw, tax partner with BDO in Scotland, said: “The impact of this change will be to increase the costs of a £200,000 property for a buy-to-let landlord or second home owner from £1,100 to £7,100. Given that many landlords work to quite tight budgets it is clear that this is a substantial disincentive to invest.”
With buy-to-let landlords also facing a cut in tax relief available on mortgage interest, and tenancy reforms on the way north of the Border, the latest announcement could help level the playing field for first-time buyers.
“With interest rates now likely to rise in the UK within the year all of these measures should produce a slowing in house prices and greater moderation in the housing market,” said Gouw. “If buy-to-let landlords start to offload their housing stock this should help first time buyers if supply starts to exceed demand.”
Yet the wider housing market could suffer as a result, said John Boyle, director of research at Rettie & Co. “Attacking a private rented sector that provides over 300,000 homes is quite dangerous. Is the government going to step in and house those people who end up without a home because their landlord has decided to sell up?”
The introduction of the 3 per cent additional charge in April could put downward pressure on house prices, he added: “There is a possibility that a flood of rental properties back on the market may cause an overall housing market slump – not something that governments usually want to be presiding over, but chickens may come home to roost,” said Boyle.
The draft Budget also included measures that could hit vulnerable and low income Scots who need legal advice. Among those affected by a £10m cut in Scotland’s legal aid fund to £126m – a ten-year low – will be people facing eviction, Shelter Scotland has warned.
Adam Lang, head of policy, said: “By cutting the legal aid budget Scotland risks denying households the legal representation, help, and support they desperately need.”
Calls for an end to the council tax freeze fell on deaf ears, adding to the pressure on local authorities to make deep cuts to spending on public services.
Future changes to local taxation were covered in more detail in a report from the Commission on Local Tax Reform earlier in the week. Among the proposals are the replacement of council tax with a more progressive property tax and a link between local government revenues and income tax takings.
“We will now need to wait until the New Year to discover what this will actually entail – and in this regard, it would seem that perhaps the biggest impact on local government, households and business from the draft Budget is yet to come,” said Glen.
“As the parties prepare for a season of electioneering in spring, we can be sure of one thing, whatever the outcome, – tax policy will be at the heart of many manifestos as parties seek to show how they will use the new powers in future years. “