A story he made up for Scottish island town (8)
I believe the answer is:
rothesay
'scottish island town' is the definition.
'rothesay' can be an answer for 'town' (I have seen 'Scottish town' mean 'rothesay' so perhaps 'town' could also mean 'rothesay'). I am not sure about the 'scottish island' bit.
'a story he made up' is the wordplay.
'made up' indicates an anagram.
'a'+'story'+'he'='astoryhe'
'astoryhe' is an anagram of 'ROTHESAY'.
'for' is the link.
Can you help me to learn more?
(Other definitions for rothesay that I've seen before include "Town on Isle of Bute" , "Chief town on Bute; so hearty (anag.)" , "Main town on Bute" , "Scottish town" .)