Devolution now: taxation powers in Scotland and Wales

Estimated reading time: 4 minutes

Devolution is adding new layers of complexity to pensions, creating confusion, questions and cost.

In 2013, I visited Bannockburn near Stirling; scene of the famous Battle in 1314 where Robert the Bruce defeated Edward II in the First War of Scottish Independence.

Almost seven hundred years later, calls for Scottish independence were rife again; albeit via a referendum, rather than a battle.  As the referendum drew nearer in September 2014, polls suggested that the gap between “Yes” and “No” was narrowing, and anxious Westminster-based politicians headed north of the border, in an attempt to placate the imminent voters, and avoid a “Yes” victory.

One of the main ways of achieving the eventual “No” outcome was to promise the Scottish Parliament greater control over its finances, via the devolution of tax-raising powers from Westminster to Holyrood.

Devolution now

Four years on, the impact of those devolution promises on both the operation and administration of self-invested pensions is becoming increasingly evident, as central government continues to farm out tax-raising powers not just to Scotland, but also to Wales.  By contrast, Northern Ireland continues to follow English rules, and has not yet benefited from the devolution strategy.    

The power that has attracted most headlines during the last year is the ability of the Scottish Parliament to set its own Income Tax rates and bands, which I discussed in my Blog from earlier this year, entitled “Six Scottish tax rates offer little source of relief”.

However, prior to taking full advantage of that devolved power in the last Scottish Budget, another tax had already been introduced by the Scottish Parliament; namely ‘Land and Buildings Transaction Tax’ (LBTT) – the Scottish equivalent of Stamp Duty Land Tax (SDLT). 

As with Income Tax in Scotland compared with the rest of the UK, there are differences between the rates and bands for LBTT and SDLT. 

To further complicate matters, the Welsh Government has introduced its own form of SDLT with effect from April 2018, called ‘Land Transaction Tax’ (LTT).  And yes, you guessed it, the rates and bands for LTT differ from both SDLT and LBTT!

Therefore, both the Trustees and Scheme Administrators of a SSAS or SIPP now need to be aware of which tax will apply, depending upon the location of the property being purchased, and how much tax will be incurred, depending upon the purchase price paid, and – where applicable – the annual rental amount. 

"‘Tax devolution by stealth’ is creating differences in a number of tax rates and bands - imposing additional burdens on self-invested pension providers"

Transfers – what does the taxman say?

In October 2016, Revenue Scotland generated confusion and dismay amongst SIPP providers when it declared that LBTT would apply to all in-specie transfers of Scottish-based properties between different SIPPs.  This was in stark contrast to the situation in the rest of the UK, where SDLT would not be applied to such transfers, as there was no change in the ultimate beneficiary of the asset value.

Following representations by SIPP providers - including ourselves - Revenue Scotland performed a ‘U-turn’ on the above view in December 2017, whilst allowing for the refund of any LBTT paid on in specie transfers since October 2016.  

Although this common sense decision has restored parity to the tax treatment of in specie property transfers on both sides of the border, it serves to highlight that if the ‘powers that be’ are confused by their own rules, they should expect that everyone else is also at risk of “getting yet another thing wrong”. Perpetuating this risk further, HM Revenue & Customs (HMRC) have announced that, with effect from April 2019, the Welsh Government will be able to set their own Income Tax rates and bands too.

The future of devolution

Given the precedent set in the three countries with their own versions of stamp duty, could we see from next April three different sets of Income Tax rates and bands?  And if this does come to pass, what are the implications for the administration of ‘relief at source’ amongst self-invested pension providers?

The current advice from HMRC to Scheme Administrators to carry on claiming 20% Income Tax relief, regardless of an individual’s residency and marginal tax rate, may have to be revisited if Welsh residents will also need to be identified on future information returns from the providers to HMRC.  And any resulting administrative changes to the operation of relief at source are only likely to confuse pension scheme members and generate lots of questions. For scheme administrators, this inevitably means more time, effort and cost.

Faced with an increasingly-possible break-up of the United Kingdom in 2014, the devolution of taxation powers from Westminster to Scotland and Wales seemed a suitable quid pro quo to avoiding Scottish independence.  But like so many “good ideas at the time”, the resulting ‘tax devolution by stealth’ is creating differences in a number of tax rates and bands that only serve to impose additional burdens on self-invested pension providers, their processes, and their client-facing documentation.

Initial promises of so-called “devo-max” have not yet come to pass, however, and there remain several aspects of pension tax-related primary legislation that the devolved governments cannot amend.  Examples of these would include the Annual Allowance, Lifetime Allowance and the eligibility rules for pension tax relief.  Amendments to aspects like these remain firmly centralised within Westminster; witness Theresa May’s recent invitation to Philip Hammond to ignore last year’s Conservative Manifesto, in order to help fund the NHS’s ‘70th birthday present’, which may see higher-rate pension tax relief under threat once more.

Six Scottish tax rates offer little source of relief

For more insights on taxation in Scotland, read James' blog from earlier this year.

Read the blog