Decapitalisation Rate for the 2026 Revaluation: business regulatory impact assessment

Section 1: Background, aims and options

Background to policy issue

Non-domestic rates are a tax based on property which is levied in order to help pay for the very wide range of services that councils deliver (such as education, social care, waste management, local roads management and cultural services).

The rateable value of a property is generally based on its estimated open market rental value on a specific date, the tone date. The amount that each ratepayer will pay depends – in the first instance - on the determined value of their property. The value of each property on the valuation roll is assessed by the local independent Scottish Assessor – and referred to as its “rateable value”. In order to ensure that the distribution of rates bills reflects changing property rental values over time, the tax base is “revalued” periodically. The most recent revaluation came into effect on 1 April 2023.

The next revaluation is on 1 Apil 2026 based on a tone date of 1 April 2025. Draft valuations for the 2026 revaluation are due to be published on 30 November 2025. Revaluations are every three years, with the following revaluation scheduled on 1 April 2029.

Decapitalisation rates are applied by Assessors when using the Contractor’s method to value non-domestic property. Assessors determine which method to apply when valuing property.

The Scottish Government will continue to prescribe two decapitalisation rates to be used for the contractor’s basis method of valuation at the 2026 revaluation, and the current groupings of properties in each rate will be maintained.

The decapitalisation rates will remain at 4.6% (standard rate) and 2.9% (lower rate).

Purpose/aim of action and desired effect

The intended outcome is to confirm the policy around the decapitalisation rates for the 2026 revaluation.

Options considered

Based on the most common methodologies set out in the literature to calculate appropriate ranges for decapitalisation rates and available data, a broad range of policy decisions on the precise decapitalisation rate(s) for the 2026-29 cycle could be supported. For instance, the method that considers the use of borrowing to fund the replacement cost of a property provides a range between 1.8% and 10.5% for the private sector and between 1.18% and 7.18% for the public sector.

The Scottish Government gave consideration to the following options:

1. Do nothing.

The decapitalisation rates would remain at 4.6% (standard rate) and 2.9% (lower rate), with no change to the categories. This does not require legislation as the Valuation for Rating (Decapitalisation Rate) (Scotland) Regulations 2016 came into force on 1 April 2017 and do not have an expiry date.

2. Decrease the rates.

This option sets the decapitalisation rates at 4.4% (standard rate) and 2.6% (lower rate) (matching those in England).

3. Increase the rates.

This option is illustrative and sets the upper rate at 6.15% and the lower rate to 4.18% (these rates being the mid-points of the ranges for the decapitalisation rates estimated by the three generally accepted methods).

4. Do not prescribe statutory decapitalisation rates.

Scottish assessors would be required to determine the rate(s) to apply in the valuation of properties using the Contractor’s method.

5. Change the number of categories with different rates and/or their make-up

Many different designs would be possible.

Sectors affected

The sectors affected will be those non-domestic properties which are valued under the Contractor’s method.

From an administrative point of view, the Scottish assessors will be affected insofar as they apply the statutory rates when rating a non-domestic property using the Contractor’s method.

The costs and benefits of different decapitalisation rates for different cohorts of ratepayer can only be illustrated on an ‘all else equal’ basis. Ultimately, the cost or benefit to an individual ratepayer depends on changes in capital value (for properties under the Contractor’s method)/nominal rental values (for properties under the other methods), valuation practice, other NDR policies at revaluation, including the property rates (poundage, etc.) and reliefs. These are announced at budget for the next financial year. To note, the decapitalisation rates set may influence these decisions, for instance if government’s choice of the tax rate is based on a target NDR income for 2026-27.