Wealth taxation in Scotland: a literature review

Taxes on earnings

Income taxes are applied in Scotland on non-savings non-dividend (NSND) income, which is income from salaries from employment, profits from self-employment, and pensions. Income tax rates and bands on NSND income are set by the Scottish Government, while the personal allowance is set by the UK Government. Scotland currently has a six-band system ranging from 19% to 48%. The personal allowance is reduced by £1 for every £2 earned over £100,000 and is fully withdrawn at £125,140. Pension income received in retirement is taxable where annual income exceeds the personal allowance of £12,570 per year (The Scottish Government, 2024b). From April 2027, the Scottish Government will have the power to set new rates of income tax on property income (Chartered Institute of Taxation, 2025a).

National Insurance Contributions (NICs) also apply to NSND earnings but are administered by the UK Government. Employees aged 16 or over earning more than £242 per week from one job, and self-employed individuals making profits above £12,570 per year, are liable to pay NICs. For employees, monthly earnings of £1,048 - £4,189 a month are taxed at 8%, and earnings above £4,189 at 2%. For the self-employed, NICs are 6% on profits between £12,570 and £50,270 and 2% of profits above this (GOV.UK, 2012c).

Taxes on earnings from savings and dividends are also administered at a UK level.

Savings interest is taxed on interest earned above the Personal Savings Allowance. This allowance is based on the income tax band Scottish taxpayers would be in within the UK income tax system. It is £1,000 for Scottish taxpayers who would be UK basic-rate taxpayers, and £500 for Scottish taxpayers who would be UK higher-rate taxpayers. There is no personal savings allowance for those who would be UK additional rate taxpayers. Any interest that exceeds an individual’s savings allowance is taxed at the UK income tax rate Scottish taxpayers would pay in the UK system (20%, 40%, 45%). Any interest earned on savings in Individual Savings Accounts (ISAs) is tax-free and not included in the personal allowance (GOV.UK, 2024).

Dividend income is taxed on income above the dividend allowance of £500. The rate of tax depends on which income tax band Scottish taxpayers would be in within the UK income tax system. It is 8.75% for Scottish taxpayers who would be UK basic-rate taxpayers, 33.75% for Scottish taxpayers who would be UK higher-rate taxpayers and 39.35% for those who would be UK additional-rate taxpayers. Similar to savings interest, dividend income from shares held in an ISA is tax-free (GOV.UK, 2025).

Could the current tax system tax wealth better?

There are significant reforms to the current taxation systems in Scotland and the UK, which could increase the effective taxation of wealth in Scotland without introducing a formal wealth tax. This section focuses on reforms most relevant to taxing stocks of, and returns to, wealth.

Property taxes: revaluation and reform

There is a broad consensus that the council tax in Scotland is in need of significant reform. Attempts have been made in the past to make the system more progressive at the margin, such as increasing the rates for higher bands (E-H) in 2017, and the recent announcement of new bands for homes worth over £1 million. However, they do not address the central issue: council tax remains based on 1991 property values.

As a result, households in properties of similar current market value can face tax bills that differ substantially, while properties differing in value by hundreds of thousands of pounds can face the same band and similar liabilities. The IFS estimates that over half of properties in Scotland are in the ‘incorrect band’ – that is, more than 50% would move band if properties were reallocated based on present-day values while keeping the same number of properties in each band as under the current system. Proper revaluation would therefore be a key step towards aligning liabilities with current property wealth in Scotland.

The IFS also outlines a wider package of reform aimed at improving the fairness and efficiency of property taxation overall. One approach is to reduce reliance on transaction taxes on high-value properties (such as LBTT), which can discourage mobility, and instead raise more revenue through a revalued and reformed council tax. This would better capture households whose property values have risen faster than average while they continue to live in the property, while reducing incentives to remain in a property purely to avoid transaction taxes when moving (Adam, Phillips and Ray-Chaudhuri, 2025b).

A number of organisations have called for a wide range of different types of reform to property taxation. ^[7] By way of example, Tax Policy Associates proposes a more fundamental reform: replacing council tax, business rates, and stamp duty-style transaction taxes with a land value tax based on the unimproved value of land. They propose tax rates of 0.5% and 1% applied to the current market value of the underlying land (excluding buildings and improvements). The intention is to avoid penalising investment in improvements and to incentivise productive land use. They argue that landowners should be liable for the tax; however, because the supply of land is fixed, the burden should not be passed onto tenants through higher rents in the long run, meaning landowners would bear the tax (Neidle, 2024). While the quantity of land is inelastic, there is some flexibility in how intensively land is used (for example, building upwards), which may affect development decisions at the margin.

Capital gains tax reform

The current CGT system creates incentives to limit taxation on income streams.

CGT rates are lower than income tax and NICs on employment and self-employment income, and are also often lower than tax on dividends. These tax differentials create big incentives for individuals to work for their own business - through self-employment or as a company owner - rather than as an employee, and to structure compensation and investment returns in ways that generate capital gains instead of income.

The IFS propose aligning the tax rates by increasing taxes on capital gains, capital income and income taxes. This would remove incentives to receive returns to labour as capital income or gains and create a more equal tax system where similar economic returns are taxed similarly. However, the IFS also emphasises that rate alignment should be paired with tax base reforms to avoid disincentivising investment overall. This includes reforming the tax base to only tax the real capital gains, accounting for the normal return to saving and investment, rather than nominal capital gains alone.

A further reform proposed by the IFS is removing the CGT uplift at death. Currently, if an asset is not sold before death, the increase in its value since purchase is not subject to CGT. The asset may be subject to inheritance tax (depending on thresholds and reliefs), but if the inherited asset is later sold, CGT is charged only on the gain since inheritance, not the gain accrued over the full ownership period. This creates incentives to hold appreciating assets until death and can interact with inheritance tax reliefs (including business relief) in ways that reduce overall taxation of accumulated gains.

The IFS propose two ways to remove the uplift at death. The first is that assets retain their original acquisition value, so CGT is calculated from the date the deceased acquired the asset, rather than the market value at the time of death, as is currently the practice. The alternative option is that the asset is treated as sold at death, so the deceased estate is liable for the CGT prior to the asset being passed on to the inheriting owner. The individual inheriting the asset would then assume that market price as the acquisition price for future CGT liabilities (Adam et al., 2024).

Inheritance tax reform

Recent Government announcements are expected to reduce some of the tax planning and avoidance opportunities within inheritance tax. These include caps on business and agriculture relief from April 2026 and ending the tax-free status of unused private pensions by bringing them into the estate from April 2027. However, the Government subsequently increased the relief cap, and significant incentives for tax planning remain.

In 2023, the IFS highlighted a range of issues with inheritance tax and proposed reforms to improve fairness (Advani and Sturrock, 2023). Some concerns have been partially addressed by recent reforms, but important inequities persist.

One proposal is to remove the special treatment of residential property left to descendants by increasing the main allowance for all estates to £500,000. The IFS argues the additional £175,000 allowance is unfair to individuals who die with more than £325,000 in net assets but less than £175,000 in qualifying residential property. They also note that the residence allowance disproportionately benefits areas with higher property values and disadvantages individuals without direct descendants to leave their property to.

The IFS also highlights the extent to which married couples can benefit from spouse or civil partner exemptions, particularly where the surviving spouse can restructure holdings to make use of exemptions and reliefs. For example, assets can be transferred between spouses, and the surviving spouse can sell assets with large, accrued gains without incurring either inheritance tax or capital gains tax on the historic increase in value. Proceeds can then be reinvested into assets that attract inheritance tax reliefs (e.g. qualifying business assets), potentially reducing tax on the combined estate. Surviving spouses can also use gift allowances, and if the surviving spouse lives more than seven years after making gifts, those gifts fall outside the IHT net.

Finally, the IFS notes that 90% of business wealth bequeathed is transferred as part of estates worth more than £2 million (in 2020–21 prices). Therefore, the original cap of £1 million announced by the UK Government would likely have been successful at removing incentives to pass on wealth through business assets, and amendments to this cap should consider whether they capture the bulk of large transfers of business wealth.

Tax Policy Associates similarly argues that reforms to agricultural reliefs and the then-proposed £1 million cap may not effectively prevent the use of farmland as an inheritance tax planning vehicle (Neidle, 2024b). Based on 2021/22 data, they suggest that over 300 estates using farmland primarily for IHT planning would have escaped the £1 million cap. Now the cap has increased to £2.5 million, this number will be significantly higher. They highlight the benefits of investing one’s estate in farmland, as farmland below the cap can be passed on tax-free and then sold, at which point it may be taxed at CGT rates, which are substantially lower than the IHT rate. At the same time, they note that some genuine family farms can be caught by the cap, which was part of the Government’s rationale for increasing it.

To better target IHT planning incentives without capturing genuine family farms, they propose two changes. The first is to increase the cap substantially, for example, to £20 million, so that only the largest farming estates are affected. Next, they also suggest introducing a “clawback” rule requiring relief to be repaid if inherited farmland is sold within a specified period after inheritance.

In summary, this chapter has set out how wealth is defined and distributed in Scotland, the rationale for considering wealth taxation, and the ways in which wealth is already taxed through the existing Scottish and UK tax systems. The analysis highlights that, while Scotland does not operate a formal wealth tax, many elements of household wealth are already subject to taxation, including property, estates, capital gains, and returns to savings and investments. Taken together, these taxes constitute a fragmented and complex approach to taxing wealth, shaped by a mix of devolved and reserved powers.

The review of existing taxes demonstrates that there is substantial scope to tax wealth more effectively through reform of the current system. In particular, reforms to property taxation, capital gains tax, and inheritance tax could improve fairness, reduce opportunities for avoidance and planning, and better align tax liabilities with underlying wealth. Many of these reforms could address similar concerns to those motivating proposals for a wealth tax, without requiring the creation of a new tax base.

The following chapters will review examples of wealth taxes in other countries and explore the feasibility and implications of implementing these approaches to taxing wealth in Scotland.