On 19th December 2014, HM Revenue & Customs issued a further technical note on the matter of the Scottish Rate of Income Tax. This is only the second technical note that has been issued and follows the previous note of May 2012. The Scottish rate of Income Tax comes into effect from April 2016.

The technical note is designed to set out the Government's policy intentions where the Scottish Rate of Income Tax interacts with other areas of the income tax system.

Of particular interest is the section in the 2014 technical note which deals with changes from the 2012 note. Firstly, payments from Real Estate Investment Trusts (REITs) and from Property Authorised Investment Funds (PAIFs) will now be treated as UK income and will not be subject to the Scottish Rate of Income Tax even if the recipient is a Scottish Taxpayer. This is because the matter would prove to be quite complicated for Self-Assessment and, given that it affects a very small number of taxpayers, the Government decided not to amend the return and, instead, to keep that income within the UK income tax sphere.

Secondly, and with a more widespread effect, the Government has decided that income received from an interest in possession trust (otherwise known as a liferent or life interest trust) could now be subject to the Scottish Rate of Income Tax. Previously, the intention had been that all interest in possession income would remain subject to the UK rate of income tax. Now, however, although the matter is not made explicitly clear in the technical note, it appears that income that comes from an interest in possession trust will retain its source character in the hands of the beneficiary and will be taxed at the appropriate rate.

As we have previously commented, the Scottish Rate of Income Tax applied only to non-savings income. It does not apply to interest on bank accounts, nor does it apply to dividends. For example, if the income from the interest in possession trust is derived from a shares portfolio, this would be dividend income and would not be subject to the Scottish Rate of Income Tax but rather would remain subject to the UK rate. However, if the income were derived from a portfolio of rental properties, this would be non-savings income and would be subject to the Scottish Rate of Income Tax in the hands of a Scottish Taxpayer.

Although we would prefer to see this treatment expressly set out in the technical note, this appears to be the effect of the statement and removes the potential complication for a Scottish Taxpayer which could have seen that taxpayer having to include two different entries on his or her tax return. Any avoidance of additional complication in the Self-Assessment regime is to be welcomed.

Finally, all Scottish Taxpayers will receive from HM Revenue & Customs an annual statement which shows how much of the income tax he or she has paid has been paid to the Scottish Government. It was felt that an annual statement would be administratively simpler than the information being shown on an individual's regular payslip. It is understood that this is being implemented at the request of the Scottish Government.

If you have any queries or concerns about the Scottish Rate of Income Tax, please speak to your usual Turcan Connell contact who will be happy to assist or otherwise contact us here and we will respond to your query.


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