This week, as a first step towards implementing its new tax creation powers under the Scotland Act 2012, the Scottish Government published the Land and Buildings Transaction Tax (Scotland) Bill. The Bill introduces a new Land and Buildings Transaction Tax ("LBTT"), which is intended to come into force in April 2015, and will replace Stamp Duty Land Tax ("SDLT") on transactions involving land and buildings in Scotland.
The Bill is one of three tax Bills being introduced by the Scottish Government, with a landfill tax Bill and a tax management Bill to follow. The tax management Bill will deal with the collection, compliance and appeals procedures in relation to both LBTT and the landfill tax (as well as any future tax contemplated by the Scottish Government), so that all provisions which are common to the Scottish Government’s new taxes can be found in one place.
Similarities and Differences
LBTT shares many similarities with SDLT, including much of the terminology, but there are several significant differences from the current SDLT regime. The key points to note are:
- LBTT will move away from the "slab tax" approach of SDLT, which charges the highest applicable rate of tax on the whole of the price, to a progressive tax, which will be charged only on the proportion of the price within, and at the different rates set for, the relevant band or bands.
- The Scottish Government plans to include a nil rate band and at least two other bands. The rates and bands will be set nearer the time when LBTT will take effect, but there is not yet any indication as to the levels of the rates and bands, or when these will be published. Separate bands and rates must be set for residential and non-residential property transactions.
- The Scottish Government is setting up a new body called Revenue Scotland, which is intended to be made responsible for administering LBTT. It is proposed that Revenue Scotland will work with Registers of Scotland on the management of the tax, particularly in relation to submission of returns and collection of payment.
- LBTT will be imposed on buying, leasing or taking other rights (such as options to buy) over land and buildings in Scotland, and will cover both residential and non-residential transactions. In a marked difference from SDLT, a licence to occupy non-residential property will no longer be exempt, and will, instead, be subject to LBTT, if there is a chargeable consideration that exceeds the nil rate band. Like SDLT, LBTT will be charged on the total consideration including any VAT.
- The SDLT legislation currently contains complex, anti-avoidance provisions, but the anti-avoidance provisions that there are in the LBTT Bill relate to specific exemptions and reliefs. However, the Scottish Government intends to introduce a general anti-avoidance rule, details of which will be included in the consultation on the tax management Bill.
Exemptions and Reliefs
As with SDLT, there will be various exemptions and reliefs from LBTT. The exempt transactions are similar to those under the SDLT regime, and the Scottish Government may add or remove types of transactions from the list of exemptions in the future.
Most of the reliefs that apply under the SDLT regime will be reproduced under the LBTT system. The most significant SDLT relief that will not be available under the LBTT system is sub-sale relief, the subject of much SDLT avoidance activity. Some popular commercial property transaction structures will need to be adjusted or re-thought, post-April 2015, as a consequence, and there could be an interesting impact on cross-border transactions relying on this relief. However, since the UK Government is in the process of reviewing the SDLT sub-sale provisions, by 2015 the SDLT position may well be aligned with LBTT.
Scottish commercial leases have persistently given rise to many SDLT issues for tax payers and legal practitioners in Scotland. Under LBTT, virtually all residential leases will be exempt. The Scottish Government recognises that taxation of non-residential leases (e.g. leases of commercial and agricultural property) is a complex area, and is keen to ensure that the LBTT system is aligned with Scots law and practice. To allow the detailed provisions relating to the application of LBTT to non-residential leases to be properly considered, there is little by way of substantive provision in the Bill, the intention being that non-residential leases will be dealt with in subordinate legislation, following consideration of the various options. This will ensure that the replacement system is effective, and does not give rise to unintended consequences. One option being considered by the Scottish Government is an annual tax payable as a percentage of the annual rent paid.
Companies, Partnerships and Trusts
The LBTT Bill largely replicates the existing SDLT provisions in relation to companies, partnerships and trusts. However, the Scottish Government will consider how the provisions can be made clearer and simpler during the Bill's passage through the Scottish Parliament. The Scottish Government also intends to bring forward, at the next stage of the Bill, detailed proposals in relation to the need for an LBTT charge on the transfer of shares in companies holding residential properties.
Although the LBTT Bill is moving tax on land transactions in Scotland in a positive direction, to make LBTT clearer and more in line with Scots law and practice than SDLT has been, and creating less scope for abuse, there is still considerable detail required, before it is clear how the changes will impact on Scottish property transactions, although it is to be hoped that it should be more fit for purpose than its predecessor.