Land and Buildings Transaction Tax in Scotland

Land and Buildings Transaction Tax (LBTT) replaced Stamp Duty Land Tax (SDLT) for transactions in land situated in Scotland from 1 April 2015.

The basic framework of the tax was created by the Land and Buildings Transaction Tax (Scotland) Act 2013.

This guide sets out the basic principles LBTT on commercial property. Like SDLT in England and Wales, LBTT is charged on the substance of a property transaction rather than the type of document which gives rise to the transaction. It arises irrespective of the nature or effect of particular documents, and there need not be any document for a charge to arise.

What are the main characteristics of LBTT?

LBTT is payable on land transactions where the land is in Scotland. A 'land transaction' is any "acquisition of a chargeable interest". This is widely defined and can include the transfer of a  property and the grant,  assignation, variation or surrender of a lease as well as some other less common transactions. Options in land, licences to occupy land and statutory rights such as community interests in land are also chargeable interests.

Certain interests are not subject to LBTT. These include interests such as:

• the grant of residential leases;
• property transferred to a person under the will or intestacy of a deceased person;
• transfers of property on divorce, separation or the end of a civil partnership; and
• transactions where there is no payment of money or money's worth (i.e. where the property is provided purely as a gift).

When is it payable?

LBTT will apply to transactions where the effective date is on or after 1 April 2015. As with SDLT the effective date will be completion or, if earlier, "substantial performance" of the contract. LBTT must be paid within 30 days of this date in order to avoid interest and penalties.

"Substantial performance" is where:

• the buyer "takes possession" of the whole or substantially the whole of the property;
• a "substantial amount" of the consideration is paid (in the context of a lease this means any payment of rent); or
• there is an assignation, sub-sale (but not where sub-sale development relief applies) or other transaction whereby a third party is entitled to call for a conveyance to the third party.

What is it charged on?

LBTT is payable on "chargeable consideration". As with SDLT, this includes both the money and 'money's worth' which is given directly or indirectly by the purchaser or a connected person. It can also include the release or transfer of a debt. Any VAT payable in respect of the transaction is regarded as chargeable consideration. This means that, effectively, you pay LBTT on VAT.

In terms of leases, LBTT is payable on any premium and the rent and there are different rules for each. However LBTT can also be payable in respect of other payments made under the lease, or on non-cash consideration such as agreeing to do building works.

Where a contingency affects the eventual amount of consideration that will ultimately be due, purchasers must calculate LBTT on the basis that the contingent amount will be payable. However an application to defer the LBTT payable on contingent amounts can be made in some circumstances.

Where the consideration is uncertain or has not yet been ascertained, purchasers must make a reasonable estimate of the final consideration as at the effective date of the transaction and pay LBTT on that basis. This could happen where, for example, the consideration is based on profits in accounts which have not yet been drawn up. Once the consideration becomes certain or ascertained a further land transaction return will need to be submitted and any additional LBTT paid or payment reclaimed.

What are the rates of LBTT?

On freehold transfers and lease premiums in respect of commercial property

LBTT will be charged on a progressive basis, similar to the current income tax system, under which slices of the transaction price will be subject to LBTT at increasing percentages, as follows:

Example: LBTT on a property bought for £600,000 is charged at:

0% for the first £150,000, then

3% for the next £200,000 and

4.5% for the remaining £250,000

So £13,500 must be paid in LBTT.

This differs to UK SDLT which (even after the recent changes for residential property) is charged on a 'slab' basis for commercial property, where the amount of the consideration determines a single rate of tax which is applied to the whole amount.

The Scottish Government has developed a tax calculator that allows taxpayers and agents to work out the amount of LBTT payable on non-residential transactions and another for residential transactions.

Remember that LBTT is payable on the VAT-inclusive amount.

On rent

For non-residential leases, the following tax rates and bands apply to the Net Present Value (NPV) of the rent payable under the lease:

This makes LBTT rates on non-residential leases the same as for SDLT. However the big difference between the LBTT and SDLT treatment of leases is that for SDLT you calculate the NPV just looking at the rent for the first five years of the lease – so rent increases after that time do not affect the tax paid. For LBTT it will be necessary for a tenant to revisit the position by submitting a return every three years and paying additional duty as a result of rent increases. This is an added administrative burden which increases the tenant's costs.

LBTT is not payable in respect of residential leases  except for the assignation or renunciation of a qualifying lease as defined in the Long Leases (Scotland) Act 2012 (ie a lease which was originally granted for a term of more than 175 years and which will have 100 years of the term unexpired at 28 November 2015). These qualifying leases will convert automatically to ownership on 28 November 2015 which is why they have been excluded from the LBTT exemption for residential leases.

The following tax rates and bands apply to any premium payable under the lease:

The Scottish Government has developed a tax calculator to assist taxpayers in the calculation of LBTT due, based on the rent payable in each year (or part year) of the lease.

What about linked transactions?

Where transactions are "linked" the amount of tax due on the total consideration for all the linked transactions is calculated first and then that tax is apportioned to the transaction in question on the basis of the chargeable consideration for the transaction. This prevents transactions being split to take advantage of the nil rate band or a lower rate of LBTT. Transactions will be 'linked' if they form a single scheme, arrangement or series of transactions between the same parties or connected persons.

What happens where there are missives for let or an agreement for lease?

Where missives for let or an agreement for lease is substantially performed – for example, by the tenant going into occupation of the premises – a notional lease is treated as having begun on the date of that substantial performance.

LBTT is calculated on this notional lease with the term running until the end of the term agreed in the missives for let / agreement for lease. When the lease is actually granted the notional lease is treated as running from the date of substantial performance of the missives for let / agreement for lease until the date of expiry of the actual lease in consideration of the total rent payable under the missives for let / agreement for lease and the actual lease.

This means that unless the terms of the actual lease differ from the missives for let / agreement for lease there should be no further LBTT filing obligation once the actual lease is granted (unless this becomes notifiable, or tax or additional tax becomes payable, as a result of a later linked transaction – see above for "linked transactions").

An agreement for lease that is not substantially performed will be ignored for LBTT purposes and LBTT will be payable only by reference to the grant of the actual lease.

What if an existing lease continues beyond its fixed term?

Where a lease continues after the end of its contractual term and a new lease is then granted there should not be an LBTT charge before the new lease is granted, unless it is granted more than a year after the expiry of the old lease. When the new lease is granted it will be treated for LBTT purposes as having begun immediately after the expiry of the old lease.

If the new lease is granted more than a year later, an LBTT charge could arise by reference to each anniversary of the expiry of the old lease, until the new lease is granted.

When might further LBTT returns be required for leases?

On the third anniversary of the effective date of a lease, and then every subsequent third anniversary of that date and at the expiry of the lease term, the tenant must recalculate the LBTT using the actual or most up-to-date figures. If the initial estimates were too low  a further return must be submitted and any extra LBTT must be paid within 30 days after the relevant three year anniversary of the effective date.

If the return was made on the basis of estimated rents because the actual figures could not be calculated at the time the return was made, such as in the case of turnover rents, a further return may be necessary when the rent is determined. If the initial estimates were too low, further LBTT will be payable, but if they were too high, the extra tax paid can be reclaimed (subject to time limits).

Subsequent events, such as lease variations, renewals, termination (including natural lease expiry) or assignation or subsequent transactions, may also require additional returns or additional LBTT to be paid.

What about intra group transactions?

The basic principle is that land transactions between group companies are eligible for relief. However, that relief must be claimed. Broadly, companies are members of the same group if one is the 75% subsidiary of the other or both are 75% subsidiaries of a third company.

However there are anti-avoidance provisions which prevent the relief being available in some circumstances. Revenue Scotland can also claw back LBTT relief in certain circumstances if within three years the buyer and seller cease to be part of the same group.

What about properties held in companies?

There are provisions in the LBTT legislation which will enable the Scottish Government to impose LBTT on transfers of interests in residential property holding companies in the future should they chose to. However, there are no specific rules concerning commercial properties held through companies or special purpose vehicles (SPVs). If the shares in such companies are sold rather than the underlying property then stamp duty will be payable at 0.5% rather than LBTT.

Sub-sale relief

Under SDLT, sub-sale relief prevents a double SDLT charge when someone contracts to buy property and then sells the property on before they have acquired it from the original seller, so that the property is transferred directly from the original seller to the third-party buyer.

There is no equivalent of SDLT sub-sale relief for LBTT. However, there is a targeted relief from LBTT in the case of sub-sales where there is a “significant” development or redevelopment of the land or buildings (but not agricultural buildings, mining or engineering works (other than wind farms) or plant and machinery), which completes within five years of the effective date of the sub-sale. A “significant development” means a development that is significant having regard to, among other things, the nature and extent of the land or building concerned and the market value of that subject-matter.

The relief will be available at the time of the transaction, however, it is subject to clawback in the event that development has not completed within five years.

What are the payment/filing obligations?

There is a statutory obligation on the purchaser or tenant to submit a land transaction return and pay LBTT, if due, within 30 days of the effective date of a notifiable transaction. Note that if relief is being claimed then the transaction may still be notifiable, even if there is no LBTT to pay.

A purchaser or tenant who fails to file a land transaction return by the filing date is subject to penalties. Interest is payable on LBTT which remains unpaid within 30 days of the effective date of the transaction.

Despite the 30 day deadline for submitting the return and paying any LBTT due, title to the property cannot be registered at the Land Register until the LBTT return has been submitted and the LBTT must be paid within 5 working days of submission of the return which means in practice a purchaser will usually have to pay the LBTT within 5 working days of the effective date.

Who is the relevant tax authority?

A new tax authority, Revenue Scotland, has been established to collect and administer the new taxes, in conjunction with Registers of Scotland and the Scottish Environmental Protection Agency (SEPA).

Additional guidance is available on the Revenue Scotland website.

Are there any anti-avoidance rules?

The Scottish Parliament has also legislated for a tough new general anti-avoidance rule (GAAR) to apply to the devolved taxes. It will be stronger than the UK GAAR which only targets 'abusive' arrangements.