How Does The Land and Buildings Transaction Tax Affect Leases?
Date: 03/07/2015 | Commercial Property
As of 1st April 2015 Stamp Duty Land Tax in Scotland has been replaced by Land and Buildings Transaction Tax (LBTT). LBTT is administered by Revenue Scotland rather than HMRC. Whilst there are many similarities between the two taxes there are also important differences. Those differences affect not only the amount of tax but also how and when returns are required. The changes for leases are important.
Are all leases affected?
Residential leases do not fall within the ambit of LBTT. This is less of an issue than it might on first glance appear as in Scotland it is incompetent to have a residential lease of more than 20 years. Note that a residential lease is one where the main subject matter of the transaction consists of an interest in land that is residential property. This leaves open the possibility that leases with residential and non-residential elements may be exempt. However, where six or more residential properties are let in a single transaction they are treated as non-residential and fall within the ambit of LBTT.
What are the rates of tax payable?
The tax rates are progressive in nature with the effect that passing a particular tax threshold has less impact than was previously the case under the “slab” system of SDLT.
From 1st April 2015 the rates of tax are:-
- Tax on rent – 1% of the “net present value” of the lease over £150,000 (i.e. the same as for SDLT).
To assist in calculating the net present value and the tax consequently payable Revenue Scotland provide an online tax calculator.
- Tax on premia –
0% up to £150,000
3% from £150,001 to £350,000
4.5% over £350,000
How are deposits treated?
Note also that where a deposit is payable in connection with a new lease or an assignation then that deposit will be deemed part of the consideration where it is more than twice the passing rent. For instance, this means that, if a rent deposit is paid to a landlord as part of an assignation of lease, then LBTT may be payable on that deposit.
However, reverse premia are not subject to LBTT.
Who makes a return?
It is the tenant who must make the return and pay the tax.
When is a return required?
With SDLT a return is ordinarily only required at the time the lease is entered into. For LBTT this is different and returns are required in the following situations:-
- at the Effective Date for the lease (normally the date of entry).
- whenever there is an assignation.
- whenever a lease is terminated.
- when a lease is varied so that it would now fall within the ambit of LBTT (e.g. by extending the duration or increasing the rent).
- on each third anniversary of the Effective Date.
Note that in certain cases this may mean that a pre-April 2015 lease can be brought within the ambit of LBTT.
Returns will be required where the lease continues after its intended expiry by way of tacit relocation. Cumulatively this may result in a lease which was originally not subject to tax becoming liable to tax. It is unclear at present how this will affect pre-April 2015 leases which continue by tacit relocation.
When a LBTT return is required there is also a requirement to reassess the tax paid. In making the return the tax payable is recalculated (albeit using the rates in force at the Effective Date for the lease (normally the date of entry) and additional tax may be payable.
This will cause administrative challenges for tenants and their agents and, as failure to submit a return will attract a fine, will also prove costly for those tenants who do not comply. Interest will also accrue on unpaid tax. As time passes making three yearly returns will become increasingly complicated. There will also be an added layer of due diligence to be undertaken and warranted in assignations, sub-leases and potentially property purchases and funding. Accordingly, it is essential that tenants retain clear and accurate records of returns made and tax paid. A copy of the actual return should be retained.
If a licence is granted rather than a lease does that alter things?
Whilst in other parts of the UK “licences” are often seen as different from “leases” with the consequence that they have been treated differently for tax purposes that distinction does not exist to the same extent in Scotland. In Scotland if an agreement has the fundamental requirements for a lease (i.e. parties, property, exclusive possession, rent and duration) then no matter how the parties may choose to characterise it the agreement will be a lease.
As with SDLT there are aspects of LBTT which are extremely complex. This note is not intended to be a definitive guide to how LBTT affects leases. Each individual case should be considered on its merits.
The Davidson Chalmers team has extensive experience in advising on leasing related issues. For an initial informal conversation please contact me (email@example.com / 0131 625 9191) or any of the Davidson Chalmers partners.