This month is the end of one tax year and the beginning of another. So it is apt that tax in some way or other should be the focus of this BPU. But (with a nod to Ebeneezer Scrooge’s three ghosts) we do not dwell here on taxes past or on taxes present – but on taxes yet to come (or at least on taxes yet to come in Scottish form replacing taxes already existing in UK form).
Introduction – the Scotland Act 1998 and 2012
- Under the Scotland Act 1998 legislating on various matters was “devolved” to the Scottish Parliament. But of course the Scottish Parliament’s legislative powers are limited. In the language of the 1998 Act:
“An Act of the Scottish Parliament is not law so far as any provision of the Act is outside the legislative competence of the Parliament.”
- One of the particular ways in which any legislative provision of the Scottish Parliament is “outside the legislative competence of the Parliament” is where the provision relates to matters “reserved” to the Westminster Parliament. One of the particular “reserved” matters is tax.
- The 1998 Act, in its original form, specified that reservation as follows:
“Fiscal, economic and monetary policy, including the issue and circulation of money, taxes and excise duties, government borrowing and lending, control over United Kingdom public expenditure, the exchange rate and the Bank of England.”
- The Scotland Act 2012 now qualifies that “reservation” so as to exclude “devolved taxes”. So the Scottish Parliament may now make laws in relation to taxes if they are taxes that fall within the definition of “devolved taxes”. So far the proposed “devolved taxes” are Stamp Duty Land Tax and Landfill Tax (a bit more is said about them below). But other taxes may be added to the (as yet short) list of “devolved taxes”. The power to do so is now expressed in the Scotland Act 1998 like this:
“(1) Her Majesty may by Order in Council amend this Part [of the 1998 Act] so as to—
(a) specify, as an additional devolved tax, a tax of any description, or
(b) make any other modifications of the provisions relating to devolved taxes which She considers necessary or expedient.”
- As mentioned above these “devolved taxes” are “taxes yet to come” in Scottish form. But they already exist in UK form as “Stamp Duty Land Tax” (SDLT) and “Landfill Tax”. A little is said below about the proposed Scottish replacement for SDLT – as being the one directly affecting many more people than Landfill Tax. But first something is said about the proposed “Scottish Rate of Income Tax”.
The Scottish Rate of Income Tax (“SRIT”)
- There has been some notice in the press about SRIT. But this is not another “devolved tax”. It is a new power conferred on the Scottish Parliament to affect the amount of income tax that Scottish taxpayers pay. In other words, the Scottish Parliament will not have power in relation to income tax generally for Scottish taxpayers: it will however have power to vary the rate at which Scottish Taxpayers have to pay the tax, and a proportion of the tax will go to fund spending by the Scottish Government.
- The SRIT is not dependent on the outcome of the referendum on independence: it will be introduced either way. But not until 2016. So nothing more is said about it here. It is mentioned simply to flag up the fact that it is in a different category from the “devolved taxes” in relation to which the Scottish Parliament will have overall control. So we now turn to consider the devolved tax that will replace Stamp Duty Land Tax (“SDLT”) in Scotland.
SDLT to be replaced by the Scottish Land and Buildings Transaction Tax (“LBTT”)
- Under the Scotland Act 2012, the Scottish Parliament will have responsibility for taxes on land transactions. The Scottish devolved tax to take the place of UK “Stamp Duty Land Tax” will be called the “Land and Buildings Transaction Tax”. The Land and Buildings Transaction Tax (Scotland) Bill is currently being debated in the Scottish Parliament. LBTT is expected to come into effect on 1st April 2015.
- Broadly speaking, LBTT will cover the same sorts of land transactions as SDLT currently does. In the LBTT Bill this is expressed in fairly sweeping terms in that the tax will (subject to certain exemptions) apply when anyone acquires:
“(a) an interest, right or power in or over land in Scotland, or
(b) the benefit of an obligation, restriction or condition affecting the value of any such interest, right or power.”
- Leaving aside any more esoteric form of land transaction, in a residential context the most common case where someone acquires an interest in land in Scotland and SDLT is payable is when they buy a house here. LBTT will differ in an important respect from SDLT in that LBTT will be a “progressive” tax whereas SDLT is a “slab” tax. A bit more is said about that.
- Under SDLT, where the value lies above a particular threshold the whole value is taxed at the higher rate. This is referred to as a “slab” tax. Whereas, under LBTT the tax will be payable on each portion of the value with reference to the rates applying to each portion. This is referred to as a “progressive” tax. It is easier to illustrate the difference by way of an example.
- Suppose under the current SDLT regime you buy a house for £250,000. The rate of SDLT applying to the “slab” of value up to and including £250,000 is 1%. So the SDLT payable on this purchase would (at current rates) be £2,500.
- Suppose however (again under the current SDLT regime) you buy a house for £250,100 i.e. you pay only £100 more. For transactions in the range over £250,000 up to £500,000 the rate of tax is 3%. So, if you buy a house for £250,100 that is over £250,000 and so the 3% rate applies to the whole amount – not just to the £100 excess. So there would be £7,530 SDLT to pay.
- Under LBTT this “slab” approach will not be adopted. Instead the tax will be “progressive”. As yet the tax rates and thresholds for LBTT are not known. But – by way of illustration only – let us assume that the rates and thresholds for LBTT will be the same as for SDLT.
- In that case, in our example where you buy a house for £250,100 there would be tax of £2,503 (i.e. £250,000 x 1% = £2,500 and £100 x 3% = £3).
- Of course, whether in reality less tax proves payable will depend on the rates and thresholds fixed. But the principle of LBTT being a “progressive” rather than a “slab” tax is, in principle, attractive.
Note: This material is for information purposes only and does not constitute any form of advice or recommendation by us. You should not rely upon it in making any decisions or taking or refraining from taking any action. If you would like us to advise you on any of the matters covered in this material, please contact Ian Ferguson: firstname.lastname@example.org