2nd November 2026
Changes to property-related taxes announced by the UK Government may appear to have little direct impact on Scotland. However, an important point highlighted by the Fraser of Allander Institute is that decisions taken at Westminster can have financial consequences for the Scottish Government even when the equivalent tax arrangements in Scotland remain unchanged.
This is an important distinction because Scotland has its own tax system in several areas, but its overall public spending budget is still influenced by decisions made by the UK Government.
The issue illustrates just how complicated the financial relationship between Westminster and Holyrood has become.
The block grant adjustment: the hidden complication
The reason lies in a financial mechanism known as the Block Grant Adjustment (BGA).
Under the devolution settlement, Scotland receives funding from Westminster through its block grant, but adjustments are made to reflect taxes that have been devolved.
When the UK Government increases a tax in England, Wales and Northern Ireland, the Treasury calculates how much additional revenue would have been raised in Scotland if the tax had remained under Westminster control. This is reflected in the adjustment to Scotland's funding.
In this case, the Fraser of Allander Institute estimates that the latest four percentage point increase in property income tax rates will reduce Scotland's block grant by approximately £60 million a year from 2027-28 onwards.
FAI+1
That reduction can happen even if the Scottish Government decides not to increase tax on landlords in Scotland.
Holyrood faces an uncomfortable choice
The Scottish Government now has several options.
It could introduce an equivalent increase in property income tax, helping to offset the reduction in Westminster funding. Alternatively, it could introduce a smaller increase or decide to leave Scottish landlords unaffected.
However, choosing not to increase the tax would leave a hole in the Scottish budget which would have to be addressed through other tax revenues, spending reductions or adjustments elsewhere.
There is an important political consideration too. Scottish income tax already operates with six bands, compared with three in the rest of the UK. Matching Westminster's new rates would mean some Scottish landlords potentially facing property income tax rates as high as 52%.
The Scottish Government therefore has to consider not just the revenue implications but also the impact on landlords, investment and the availability of rented accommodation.
FAI+1
The wider problem with devolution
This is a good example of how complicated the relationship between the UK and Scottish budgets has become.
Holyrood has considerable freedom over certain taxes, but decisions made at Westminster can still affect the money available to Scotland.
The difficulty is that the Scottish Government can be left facing the political consequences of a smaller budget even when it has not made the original tax decision.
With public services already under considerable financial pressure, £60 million is not an insignificant sum.
The Scottish Budget is due to be presented on 3 December. It will be interesting to see whether the Scottish Government follows Westminster's approach, chooses a different tax policy or accepts the reduction in available funding.
The important point for taxpayers is that a decision which appears to have no direct effect on Scotland can nevertheless have a very real impact on the money available to run the country.
Further analysis Fraser of Allander Institute
Note
The £60 million figure is an estimate, not an immediate cash deduction. It is also important to distinguish property income tax from the separate increase in savings income tax, which applies UK-wide.