What is Land and Buildings Transaction Tax?
Land and Buildings Transaction Tax (“LBTT”) is the charge that will replace stamp duty land tax (“SDLT”) in respect of Scottish land transactions. It comes into effect on 1 April 2015.
LBTT is a progressive tax, meaning that each rate of tax is only charged on the part of the price that is within the relevant rate band. This differs from SDLT on commercial transactions (and residential transactions prior to 4 December 2014) where the whole consideration (and not just the part above the rate band) is taxed at the highest applicable rate of tax. Importantly, it will apply to both commercial and residential properties (not just to residential as in England and Wales).
What are the LBTT rates?
The current published LBTT rates for property acquisitions and lease premiums (but excluding LBTT on rents) are:
- Up to £150,000 – 0%
- £150,001 - £350,000 – 3%
- Over £350,001 – 4.5%
- Up to £145,000 – 0%
- £145,001 - £250,000 – 2%
- £250,001 - £325,000 - 5%
- £325,001 - £750,000 – 10%
- Over £750,001 – 12%
How will I be affected by LBTT?
LBTT will be payable in relation to land transactions with an ‘effective date’ on or after 1 April 2015. Broadly, the effective date will be completion, or substantial performance of the contract (if earlier), and therefore LBTT will be relevant to any contracts entered into prior to 1 April 2015, where completion will or may be on or after that date (e.g. conditional purchase contracts).
Any Scottish land transactions with an effective date prior to 1 April 2015 will be subject to SDLT. In addition, transactions that implement contracts entered into on or before 1 May 2012 will still be subject to SDLT even if they complete on or after 1 April 2015 - unless after 1 May 2012 the contract was varied or assigned, or the transaction was triggered by an option exercised after that date.
When and who will I pay?
LBTT will be administered and collected by a new body called Revenue Scotland. LBTT must be paid at the same time as submission of the land transaction return, as part of the process of registration of title, within 30 days of the effective date of the land transaction. LBTT calculators may be viewed here.
Does LBTT differ from SDLT?
- most reliefs that apply to SDLT will also apply to LBTT in some cases with certain variations e.g. group relief and multiple dwellings relief (“MDR”), with the notable exception of a general sub-sale relief.
- we understand that there will be a targeted “significant development” relief for forward-funding transactions where relief will be available if the development takes place within 5 years. We understand that this relief remains currently under review.
- There is no restriction for dwellings subject to leases of 21 years or more in the application of MDR to the LBTT. However if the result of MDR means that tax chargeable in relation to the transaction is less than 25% of the tax that would have been payable but for the relief, LBTT of 25% is payable.
- No equivalent anti-avoidance provision to s.75A of Finance Act 2003 applies specifically to LBTT. However, a new general and wide-ranging anti-avoidance rule in Part 5 of the Revenue Scotland and Tax Powers Act 2014 applies to all Scottish taxes, including LBTT.
- Generally the grant, assignation or renunciation of leases of residential property will be exempt from LBTT. Such residential leases will only be subject to LBTT where a lease exceeding 175 years exists, albeit that residential leases with over 100 years to run and less than £100 per annum in rent will convert to ownership under the Long Leases (Scotland) Act 2012 on 28 November 2015.
- For non-residential leases, LBTT will be payable on the net present value of the rents at the same rate bands as apply for SDLT, but there will be additional administrative requirements. A return will be required to be submitted every three years by the leaseholder with an obligation to adjust the LBTT if necessary.
- The LBTT legislation will allow the Scottish Government to impose LBTT on transfers of interests in residential property holding companies that are not listed on a recognised stock exchange.
Property Funds and LBTT
While new forms of fund structure to hold real estate in the UK (specifically the Property Authorised Investment Fund (PAIF) and the tax-transparent Co-ownership Authorised Contracted Scheme (CoACS or TTFs) continue to excite considerable interest and new fund launches, concern remains about the SDLT (and now in Scotland, the LBTT) implications of setting up new funds and of transferring UK property portfolios into them.
When UK property is already held subject to an existing unit trust then, properly structured, a 100% SDLT relief already exists for transferring UK property to a PAIF. There is, however, currently no equivalent relief for transfers of property located in Scotland from a unit trust to an PAIF, so that even though there is no change of economic ownership there could be an LBTT charge where a fund has some properties located in Scotland. It is not expected that the Scottish Government will want to place the property market in Scotland at a comparative disadvantage and so it is believed likely that they will consider enacting a similar relief in respect of LBTT to that already available for SDLT (UK Statutory Instrument 2008 No.710).
HM Treasury and HMRC ran a consultation on SDLT and property funds which closed in September 2014. This considered widening the relief from SDLT and also rules for SDLT treatment of property held in tax-transparent funds, such as CoACS. The Government’s intention to make changes to SDLT rules in line with the consultation conclusions was confirmed at Budget 2015. The changes proposed are intended to be made in Finance Bill 2016, after further consultation. There are, however, currently no similar proposals regarding LBTT for property located in Scotland. We would hope that the Scottish Government will consider LBTT changes similar to those envisaged by the UK Government consultation as we consider that this would help the Scottish real estate industry.