UK proposes gross payment of Scottish Government bond interest

The proposal is intended for Finance Bill 2026-27 and is not yet enacted. It would apply to interest paid on or after 28 October 2026, including payments made before Royal Assent if the legislation is enacted with the stated retrospective effect. The bonds must be issued under section 66(1A) of the Scotland Act 1998, which permits Scottish Ministers, with Treasury approval, to borrow for capital expenditure by loan or by issuing bonds other than bearer bonds.^[1][2][4]

How the exemption would work

Chapter 5 of Part 15 of the Income Tax Act 2007 governs deduction from UK public-revenue dividends. Section 893 currently makes interest on specified gross-paying government securities payable without deduction where its conditions are met. HMRC says the Bill would amend section 893 so that qualifying Scottish Government bonds fall within that definition.^[1][3]

The change concerns tax deducted at source by the Scottish Government; it does not state that bond interest is exempt from tax in the hands of every holder. Investors would still need to determine their own UK and residence-country treatment, including any reporting, exemption or credit position. HMRC expects the administrative impact on business to be nil and describes the objective as aligning the bonds with market expectations for sovereign-style debt.^[1]

Do not apply the proposal as enacted law

Issuers, paying agents, custodians and prospective investors should identify whether an instrument is issued under section 66(1A), preserve the Treasury-approval evidence and monitor the Finance Bill text and Royal Assent. The proposal does not itself confirm a bond issue, coupon, payment date or holder-level tax result. Other Budget 2026 measures and the final clause wording remain separate from this focused withholding-tax coverage.^[1][2][4]