Stamp duty land tax (SDLT), the UK tax on property transactions, is to be replaced in Scotland by a new tax known as land and buildings transaction tax (LBTT). LBTT is being introduced under the Land and Buildings Transaction Tax (Scotland) Act 2013 (the 2013 Act), and will come into effect on 1 April 2015, irrespective of the results of the September 2014 Scottish independence referendum. LBTT will apply to property transactions completing on or after 1 April 2015 unless carried out pursuant to contracts entered into prior to 1 May 2012. Transactions occurring pursuant to earlier contracts will generally remain subject to SDLT.
SDLT operates on the basis that the same rate applies to the entire consideration for a transaction. For example, for commercial property, a transaction with a price of exactly £500,000 is subject to 3% SDLT on the whole price whilst a transaction with a price of £500,001 is subject to 4% SDLT on the whole price. LBTT will operate on a different basis, and will be calculated in a similar manner to income tax. This means there will be progressive rates of LBTT, with each part of the purchase price being subject to LBTT at a different rate.
The actual rates of LBTT are not yet known and it is unlikely that they will be announced before September 2014. However, a consultation document which preceded the 2013 Act provided example rates that will apply to Scottish property transactions. These rates may change, but they give an indication of the Scottish Government’s thinking. The rates set out in the consultation document were as follows:
- For residential property, the document outlined two possible sets of rates. However, the two approaches were dramatically different. Under the first example, the first £180,000 of a transaction would be taxed at 0%, the next £1.32 million taxed at 7.5% and any excess over £1.5 million taxed at 10%. By contrast, the second example stated that the first £125,000 would be taxed at 0%, the next £125,000 taxed at 2% and any excess over £250,000 taxed at 9.5%. Clearly, this area is subject to review!
- For commercial property, the document outlined a single set of example rates under which the first £150,000 would be taxed at 0%, the next £100,000 would be taxed at 3% and any excess over £250,000 would be taxed at 4.4%.
An obvious question is whether LBTT charges will be higher than the current SDLT charges payable on Scottish property transactions. Clearly this cannot be answered until the rates are set but the indications are that for commercial transactions of over £2 million, LBTT will be higher than SDLT. Concerns have been expressed that this may act as a disincentive to property investment, and the level at which the rates should be set is the subject of ongoing discussions between the property industry and the Scottish Government.
The 2013 Act is largely based upon the current SDLT legislation. Accordingly, for many transactions the application of the rules may be unchanged. However, there are a number of differences, and the following, in particular, should be noted.
Under SDLT legislation, a relief is available for many transactions involving a “sub- sale” or “transfer of rights”. Broadly, if A contracts to sell to B, and B subsequently contracts with C to either (i) transfer the property to C or direct a transfer to C or assign B’s rights to C, then B can, in many cases, avoid an SDLT charge. However, the LBTT rules do not contain any such relief. Indeed, the 2013 Act states that entering into the B to C contract will amount to “substantial performance” of the A to B contract thus accelerating B’s liability to LBTT. This represents a major change from the SDLT legislation, and careful structuring may be required for many transactions.
It is worth noting, however, that the Scottish Government has agreed to consider whether targeted relief can be introduced for forward-funding transactions (provided that such a relief does not create a vehicle for LBTT avoidance), and is currently discussing this issue with a working group which includes representatives of the property industry.
Licences to occupy
Under the 2013 Act, licences to occupy are exempt (as they are under the SDLT regime), but it is expected that regulations will be introduced by the Scottish Government to bring certain categories of licence (such as airport concessions and kiosks within shopping malls) within the scope of LBTT at some point prior to 1 April 2015. The Scottish Government has stated, however, that it does not intend to bring hotel operator licences within the scope of the tax.
LBTT on rents
SDLT is chargeable on rents, with the amount being calculated by reference to the “net present value” of all rents payable during the term of the lease. A single calculation is required at the time of grant of the lease with the highest annual rent payable during the first five years being assumed to be payable in the sixth and subsequent years. Where, at the time of grant of the lease, the amount of rent payable during that five-year period is uncertain, the SDLT return must be reviewed (and, potentially, more SDLT paid) once the five-year period has passed or, if earlier, once the actual amount of rent has become certain.
The LBTT calculation will be somewhat different! Again, the charge will be based on the actual rents payable during the life of the lease but the five- year rule (described above and which deems the highest rent payable during the first five years also to be payable in later years) will not apply. Instead, the amount of LBTT paid in relation to a lease is required to be reconsidered every three years with further LBTT payable if the amount of rent has increased. For example, a 30-year lease would require an initial LBTT return with nine subsequent reviews (and, potentially, nine subsequent LBTT returns) to take account of rent increases that occur during that 30-year term.