Swinney could use Budget to alter property tax

John Swinney may be tempted to copy George Osbornes 3 per cent stamp duty land tax surcharge on buy-to-let and second home purchases. Photograph: Phil Wilkinson

John Swinney, also the Deputy First Minister, will on Wednesday deliver what will effectively be the fourth Budget affecting Scottish households this year, following the March Budget, July’s emergency Budget and last month’s Autumn Statement.

But while Scotland has new tax powers taking effect in 2016, Swinney will have little room for manoeuvre until a full Scottish fiscal framework is in place.

That remains the subject of ongoing negotiations between the Scottish Government and Westminster, with the Scotland Bill yet to pass through parliament.

Swinney met Treasury officials for the fifth time last week in an attempt to reach agreement on a fiscal framework for new tax and spending powers. The Lords economic affairs committee has warned that the Scotland Bill should not go ahead until the fiscal framework is published and scrutinised, adding that moves to devolve income tax powers had been taken with “undue haste”.

Martin Bell, head of tax with BDO in Scotland, said: “Although he will be keen to demonstrate that the Scottish Treasury is independent of the rest of the UK, I think that John Swinney will be hampered in producing anything too radical in the Scottish Budget.”

The powers that Swinney has at his disposal on Wednesday include the new Scottish rate of income tax, which was part of the Scotland Act (2012) and takes effect in April. This will see the current income tax rates 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 and it could also be cut to zero (though earnings bands will remain the same across the UK in the 2016-17 tax year). So if the Scottish rate is increased to 11p, the overall tax rates for Scottish taxpayers will become 21, 41 and 46p.

It will almost certainly remain unchanged, said Stephen Hay, head of tax at RSM in Scotland.

“As he can’t introduce and increase the higher or additional rates and also decrease the basic rate until the Scotland Act is enacted, chances are that the rate will be set at 10p with no changes to the tax rates compared to the UK,” he explained.

Barry Lawrie, partner at French Duncan, agreed. “The fact that this increase needs to apply across the bands means the Government can’t increase the top rate without also increasing the lower rates. With the Scottish Parliament elections in May, I predict there will be no increase.”

With income tax changes very unlikely, the focus for Scottish households on Wednesday will be around land and buildings transaction tax (LBTT, the Scottish version of stamp duty) and council tax reform.

Swinney may offer a hint as to future changes to local taxation, according to David Glen, head of tax, PwC in Scotland.

“There have been some suggestions that we may see a change to current council tax as there is a growing momentum for reform of local taxation,” he said.

“With the Commission on Local Tax Reform due to report imminently, the Scottish Budget may simply give a foretaste of greater local taxation changes that could have a wide impact on individuals and households.”

But the greatest interest may be around LBTT, which took effect in April. In his autumn statement last month the UK Chancellor unveiled a 3 per cent stamp duty land tax (SDLT) surcharge on buy-to-let and second home purchases, taking effect in April. With that putting distance between property taxes in Scotland and the rest of the UK, Swinney can either maintain that gap or match Osborne’s move.

“Currently, a second home costing £350,000 would incur SDLT of £7,500 and LBTT of £8,350, but from April 2016 the SDLT rises to £18,000,” Hay pointed out.

So will Swinney increase the rate on buy-to-let and second homes? Hay doesn’t think so: “If the rates were going down, he’d probably follow suit, but leaving the residential property market alone may well be the better option,” he said.

However, the Scottish Government may be keen to address a shortfall in revenues from LBTT. Tinkering with LBTT rates or banding levels could be a way of doing this, said Bell at BDO.

“Swinney is limited in what else he can adjust to increase revenues and he will be conscious that North Sea oil revenues, which the Scottish Government has already predicted to fall substantially, may need to be downgraded further given the continued fall in oil prices this week. This could leave him with a further hole in the finances for the coming year.”

Yet Bell doesn’t expect Scotland to follow Osborne’s lead on buy-to-let and second home taxes.

“Targeting these groups is politically neutral/favourable and increasing the cost of purchasing buy-to-let and second homes could bring in substantial revenues for the Scottish Government,” he said. “But if he does not or cannot make any amendments to the LBTT charged to these groups there is the potential for Scotland to become a haven for disaffected investors who see it as a potentially cheaper place to invest in property, at least in the short term.”