The Land and Buildings Transaction Tax (LBTT) applies to land in Scotland from 1 April 2015 and will be administered by Revenue Scotland. Transitional provisions retain some transactions within SDLT, particularly where the contract was before 1 May 2012, and some payments arising out of earlier transactions will still be made to HMRC. The LBTT’s main differences from SDLT are different rates and thresholds, exemption of residential leases, increased compliance obligations with three-year reviews for commercial leases, and sub-sale relief restricted to significant developments. Anti-avoidance provisions are in a Scottish GAAR, with no equivalent of FA 2003 s 75A or the 15% charge. The annual tax on enveloped dwellings (ATED) continues to apply to Scotland.
The new version of SDLT for land transactions in Scotland will
commence in a matter of weeks. Real estate lawyers advising on deals in Scottish land will no doubt swiftly become proficient in handling the administrative mechanics of LBTT – closely linked as it is to land registration. Tax advisers will need to be able to explain the differences between LBTT and SDLT to clients who own land in Scotland, as well as in the rest of the UK. The aim of this article is to give a summary of the legislative background, the main differences, the transitional provisions and the points to watch.
The power to set and collect certain taxes is, of course, part of the process of devolution to Scotland. Taxes on or in relation to real estate are easier to devolve, because it is quite clear which country the land is in. Therefore, LBTT and Scottish landfill tax are the taxes to be devolved on 1 April 2015.
Scotland Act 2012 provided powers for the Scottish Parliament to introduce devolved taxes and also for the disapplication of SDLT and the landfill tax. Since that Act became law on 1 May 2012, the transitional provisions between SDLT and LBTT have reference to that date, as well as to the 1 April 2015 commencement date. Detailed provisions for the tax are in Land and Buildings Transaction Tax (Scotland) Act 2013 (LBTT(S)A 2013).
Revenue Scotland was established under the powers of the Revenue Scotland and Tax Powers Act 2014 (RSTPA 2014) and came into existence as a non-ministerial department of the Scottish Administration on 1 January 2015. It will administer the new taxes and will work with and delegate some powers to Registers of Scotland, the body responsible for registration of land in Scotland, in relation to LBTT. This Act provides for the administrative powers of Revenue Scotland. It also includes the specific penalty regime for LBTT and a Scottish GAAR. Revenue Scotland is also required to prepare a charter to specify the standards of behaviour and values to which it and taxpayers are expected to adhere.
The provisions of these Acts have been filled out and amended by a number of Scottish statutory instruments in a continuing process – some of which are still in draft form at the time of writing – as follows:
A surprising feature of LBTT(S)A 2013 is the sheer range of regulating powers given to Scottish ministers, which could be used to change the charging provisions. These go far beyond minor tinkering with definitions of chargeable interests, the scope of reliefs or deadlines for returns. The main tax rates and bands can be changed by order and key schedules can be modified by regulation – in some, but not all, cases subject to the affirmative procedure. To the author, who was once an official responsible for instructing parliamentary counsel in relation to Finance Bills, these seem alarmingly close to ‘Henry VIII powers’ – though that sovereign was not in a position to modify Scottish legislation.
Revenue Scotland issued a guidance document as at 15 February 2015 on its website. In due course, this will be transformed into a webpage online manual, which will no doubt be easier to maintain but may or may not be more convenient for users.
The starting point for LBTT was SDLT restricted to Scottish land interests, so the overall structure and guidance is very familiar. We have land transactions, chargeable interests, contract and conveyance, consideration, notifiable transactions, linked transactions, land transaction returns and exemptions and reliefs. Scots law terminology is used (for example, missives of let, assignations and renunciations of leases). Administration will be rather different and Revenue Scotland will no doubt develop its own style as the devolved taxes bed down.
Three areas have substantial changes which materially affect the tax charge and day to day advice: the tax rates and bands; tax on leases; and sub-sale relief. These are considered in turn below.
It is perhaps disappointing that there is little change to the partnership provisions.
These differ from SDLT – though not by as much as first appeared when originally announced. SDLT also went on to a slice system in the December 2014 Autumn Statement and the LBTT rates were modified in the light of this change.
The Revenue Scotland website has a number of online calculators for LBTT liabilities.
For purely residential transactions, there is the same schedule of rates; but LBTT has a longer zero rate band and the 10% and 12% rates start at rather lower levels of consideration, as below. LBTT is therefore less onerous for lower amounts of consideration, but is higher than SDLT for consideration above £330,000. See figure 1 below.
LBTT does not have the 15% charge for residences over £500,000 being purchased by companies or other relevant ‘envelopes’. Such a rate, of course, seems rather less punitive given that the maximum marginal rate is now 12%. The thought that LBTT might be avoided on residential transactions once a property had been bought by a company was nevertheless in the legislators’ minds. There is a provision (LBTT(S)A 2013 s 47) that transfers of interests in unlisted residential property holding companies could be treated as chargeable land transactions, if Scottish ministers lay regulations to switch on the provision.
It seems unlikely that this provision will be invoked for the moment, since the annual tax on enveloped dwellings (ATED) continues to apply to enveloped Scottish dwellings over the relevant threshold. ATED is a freestanding tax and there is as yet no legislative provision to switch it off for Scotland.
It is important to note that for non-residential and mixed transactions LBTT has moved to a slice system, while SDLT retains its slab system whereby a single rate is applied to the total amount of consideration as shown below. LBTT is lower for consideration up to £1.95m and SDLT is lower thereafter. See figure 2 below.
Residential leases are exempt from LBTT. That is to say, leases (and licences) where the main subject matter is residential property are exempt from LBTT under Sch 1, with exceptions if the lease is very long (over 175 years) or if the transaction is linked with non-residential transactions. Such transactions are accordingly not even notifiable. Neither any premium nor the net present value (NPV) of the rental stream is charged to LBTT.
This seems strange, at least to practitioners in England, where flats are often leased (say, for 99 years) for a high premium and a modest ground rent. However, it seems that corresponding transactions in Scotland would be freehold purchases. The exempt leases will in practice be rentals at more or less market levels of rent.
For leases of non-residential or mixed property, the SDLT system is preserved – in that any premium is charged on the above LBTT rate schedule (with loss of the nil rate tax band if the relevant rent is at least £1,000) and the rental element is charged on 1% of a calculated NPV of the rental stream to the extent that it exceeds £150,000. The big difference is the treatment of variable rent.
The SDLT formula for the NPV of lease rent depends only on the levels of rent in the first five years of that lease, with the maximum amount in a 12 month period being used for years six onwards. At worst, there will be a return when the lease is granted based on an estimate and then a single recalculation and adjustment no later than the five-year point. For LBTT, the initial liability is based on a reasonable estimate of the actual rent levels over the term of the lease. There is then a system of three-year reviews, starting with the effective date if the lease was notifiable when granted, or later if the lease first became notifiable due to contingencies, etc. On a lease review date, the liability is recalculated and any extra tax is paid or excessive tax reclaimed – though a return is required even if there have been no changes. The three-year cycle is not affected by an assignation (the assignee takes on responsibilities as in the SDLT system). The recalculation also takes account of changes in the term of the lease. The tenant has to file a return if there is an assignation or termination of the lease.
This means that commercial leases are subject to onerous compliance requirements. The result is no doubt technically more correct, as the amount of tax is adjusted in relation to the rent levels as time goes on.
Assignations and certain variations where consideration is paid may themselves be notifiable land transactions in the hands of the purchaser or deemed purchaser, as for SDLT.
The list of SDLT reliefs is generally duplicated in LBTT. However, sub-sale relief is greatly narrowed and does not have the elaborate structure now provided for SDLT.
The history of the policy on LBTT sub-sale relief was the feeling that, based on experience with SDLT, such a relief was a tax avoider’s charter. Attempts were made not to include any such relief but, just as with SDLT in a different era, many representations were made that the absence of such a relief would damage (by effectively double-charging) certain deals, especially development deals. No doubt not wishing to be seen as anti-development in Scotland, the Scottish Ministers will insert a grudging sub-sale development relief by Order (published in draft). (The official word for grudging is ‘targeted’.)
Schedule 10A of LBTT(S)A 2013 will provide a sub-sale development relief. Where there is a sub-sale pursuant to a contract which meets the simultaneity condition familiar from the SDLT sub-sale rule, the first buyer may be able to claim relief. The condition is that the second contract must lead to a ‘significant development’ of the subject matter of the second land transaction. The second buyer is subject to LBTT on the consideration under the sub-sale contract and on so much of the consideration under the first contract as is referable to the subject matter of the sub-sale transaction and is to be given (directly or indirectly) by the second buyer or a person connected with the second buyer. Again, this is a familiar formulation and allows for the fact that the second buyer may have to pay more than the first buyer contracted for.
Within five years of the sub-sale transaction, a significant development must take place. A significant development is defined to mean development that is significant having regard to, among other things, the nature and extent of the subject matter of the sub-sale transaction and to the market value of that subject matter; and a significant development includes redevelopment. It requires the construction or redevelopment of buildings, which are widely defined to include most types of commercial building but not within the agricultural sector, mining or engineering (apart from wind farms) and not to include plant and machinery. For the redevelopment of buildings, the redevelopment works carried out must be comparable in scale or cost to the construction of such buildings. There is withdrawal of relief in the event of significant development not taking place within the five-year period and partial withdrawal when only a proportion of the development has been finished within the period.
Without attempting to be comprehensive, the following differences are evident.
The crofting right to buy is a full relief, rather than the partial relief under SDLT. The floor for multiple dwellings relief is 25% of the LBTT otherwise chargeable, while SDLT has retained the value of 1% of total consideration on the dwellings. The level of acquisition relief under LBTT is 12.5% of the tax otherwise chargeable, while it remains at 0.5% of total consideration for SDLT.
The Crown itself is exempt from LBTT, while it is not exempt from SDLT, though the reliefs for ministers of the Crown and government bodies seem to match.
Many of the details of the administrative process have yet to become evident. Revenue Scotland can delegate functions to the keeper of the registers of Scotland; and registration is tied into the LBTT process, just as it is in SDLT.
It is possible to register for the online portal.
One administrative point of difference with SDLT is that Revenue Scotland has three years to open an enquiry, compared with the nine months in SDLT; and a closure notice generally has to be issued within this same period. However if the case is referred to the tribunal, closure is blocked. Ironically, taxpayers may be better off, compared with SDLT, with this longer period. Many HMRC enquiries have in practice started after nearly nine months and gone on for years. And HMRC generally awards itself four years if there is any dispute, since the courts have been generous in allowing them to claim discovery, so there is little assurance of finality when no enquiry is launched within nine months.
HMRC has issued guidance on the transitional provisions (see www.bit.ly/1KrUFuX).
Clearly, transactions in Scottish land which entirely take place on or after 1 April 2015 will not be subject to SDLT rules. This is because such land will not be a chargeable interest for SDLT purposes, though there may be mixed deals where Scottish land affects the just and reasonable apportionment of consideration or may be the consideration for an SDLT land transaction. There are, though, a number of circumstances where aspects of a deal occur both before and after the LBTT commencement date.
The main category of transactions in Scottish land with effective dates after 31 March 2015 which are nonetheless retained within SDLT are those where contracts for land transactions were made (i.e. missives were concluded) before 1 May 2012 (when Scotland Act 2012 became law). The substantial performance and completion/settlement of such contracts remains within SDLT unless a disqualifying event intervenes after 1 May 2012. A disqualifying event is any of:
If the disqualifying event occurs before the substantial performance, both the substantial performance and settlement are within LBTT (if on or after 1 April 2015). However, the land transaction with an effective date triggered by substantial performance stays within SDLT if the disqualifying event is later. In that case, the settlement is chargeable to LBTT only to the extent that the tax exceeds the amount already charged to SDLT.
Where conclusion of missives is between 2 May 2012 and 31 March 2015, any substantial performance prior to 1 April 2015 will remain subject to SDLT. Substantial performances and settlements on and after 1 April 2015 will be within LBTT, however; again with settlements only being charged on the excess if substantial performance was within SDLT.
Transactions in Scottish land within the scope of LBTT are not linked for SDLT purposes with any SDLT transactions. Linkage does not span the two taxes. Nor are the exchange rules of either tax applied where one side of the exchange is entirely within SDLT and the other side entirely within LBTT. This all arises from the fact that each tax has its own definition of a chargeable interest and these will not overlap from 1 April 2015.
The SDLT rules take some care that further payments in relation to SDLT transactions go to HMRC rather than Revenue Scotland. Clawback charges for group, reconstruction, acquisition and charities relief stay with HMRC, even if the event triggering a clawback is on or after April 2015. There are also rules which essentially preserve benefits of certain reliefs (such as shared ownership leases and some alternative property finance reliefs). Similarly, SDLT leases for an indefinite term continue to be charged under the rules that extend the term for SDLT purposes from one year to two years, etc. And an SDLT lease with variable rent still has to adjust its payment at the five-year point of the appropriate earlier date – and still stays within SDLT if the increase in actual rent triggers a first notification. The overlap relief rule of FA 2003 Sch 17A para 9 is substituted by the corresponding LBTT rule in LBTT(S)A 2013 Sch 19 para 25, even when a surrender and re-grant is from an SDLT lease to an LBTT lease. Similar dances between the two taxes occur when there is an assignment of a lease which would have been treated as a grant under SDLT or for leases varied in such a way that there would have been an SDLT charge.
FA 2003 s 75A applies in relation to notional transactions with effective dates before 1 April 2015, under the SDLT rules, but LBTT does not have a corresponding anti-avoidance provision. Since they have a GAAR from the start (RSTPA 2014 Part 5), it was evidently thought that this (and the absence of a comprehensive sub-sale relief) would suffice.
