Land and Building Transaction Tax – Commercial focus in Scotland

From 1st April 2015 there will be a new tax system in place applicable to all land and property transactions in Scotland, known as the land and building transaction tax ("LBTT"). This will replace the current system in Scotland, Stamp duty land tax ("SDLT"). This article will focus on the aims of the new tax system and how the LBTT regime will work, with a particular focus on the potential implications from a commercial property standpoint, both in relation to commercial purchases and commercial leases.

Purpose

The purpose of the LBTT in Scotland is to bring in a tax system which better reflects the people and economy of Scotland, and more closely aligns with Scots law and practice. The more favourable rates and bands which will be introduced will be more beneficial for those at the lower end of the market, as they will be paying substantially less when compared with the existing SDLT system until you hit the £2million mark. Please see table below, which shows the comparison to SDLT for commercial transactions.

Characteristics

Progressive rate structure

LBTT will have a progressive rate structure for its bands and rates, which is similar to income tax, and means that the purchase price or the net present value in the case of leases is payable on the value that falls within each rate band threshold. This provides for a fairer system, and serves to avoid the bunching of property prices around the SDLT band thresholds, which currently happens, as SDLT is a “slab tax”, which means that tax is paid on the full purchase price at the highest rate into which the price falls.

For commercial land and buildings there will be a nil rate band and the tax rate for each band must be higher than the rate for the band below it. In simple terms SDLT is charged on the whole price if it exceeds the nil rate threshold where as LBTT will be charged only on the amount in excess of each rate band, which is taxed at the higher rate.

Tax reliefs and exemptions

As is the case with SDLT, there will be tax reliefs from LBTT. Examples of tax reliefs include charitable organisations under certain conditions, where CPOs are used and transfers involving multiple dwellings. Most reliefs will replicate those available under SDLT system. In addition to the tax reliefs, there will also exempt transactions, which will include where no chargeable consideration, and acquisitions by the crown. A more comprehensive breakdown of the available reliefs and exemptions can be found on the Scottish Government website.

Key concepts to remember:

• A land transaction is a chargeable transaction unless it is exempt or a tax relief is charged.
• A land transaction is notifiable unless the transaction is exempt or if the chargeable consideration is less than £40,000.
• In order to ensure that LBTT is paid, there is special provision for certain scenarios where tax will be chargeable irrespective of completion of the contract.

Tax is payable from date contract is substantially performed. Substantial performance is defined as the first event of any of the following, (1) the buyer taking possession of whole or substantially the whole of the subjects, (2) when a substantial amount of the consideration is paid, or (3) an assignation or other transaction in which a third party takes possession occurs. Any of these events will trigger the payment of LBTT.

Commercial Purchases

The introduction of LBTT does not affect the purchase of commercial properties via the purchase of companies. Like SDLT this will be unaffected.

LBTT tax is calculated on the purchase price inclusive of any VAT payable. This is consistent with SDLT. The total amount paid by the buyer is known as the chargeable consideration and forms the basis for the calculation of LBTT. In a straightforward transaction this is the purchase price for the property excluding the moveables.

LBTT may be payable when property or land is bought or transferred, whether or not it involves payment of money and/or non monetary consideration (which can include goods, services or the assumption of financial liabilities).

Tax does not apply if the property is given as a gift with no chargeable consideration involved, as this falls within one of the applicable exemptions.

For SDLT the rates are:

• 1% for between £150,001 and £250,000
• 3% for between £250,001 and £500,000
• 4% for over £500,000

For LBTT the rates will be:

• Nil rate up to £150,000
• 3% for the part of the price between £150,001 and £350,000, and
• 4.5% for any excess over £350,000

Commercial Leases

LBTT introduces a new approach to taxing leases, which better aligns the taxation of commercial leases with Scots law and practice. This is the area where differences shall be seen between the two systems. LBTT will be applied to commercial leases, in contrast with residential leases which are only subject to LBTT where an ultra long lease exists.

Payment

As with SDLT, an initial payment, based on the expected rent payments, will be made at the start of the lease. The charging structure for LBTT will be similar to the existing structure for SDLT as it will be charged on the basis of any capital payment and the net present value of rent payable throughout the lease period. The taxpayer must review the actual rent paid against the previous estimate every three years to ensure that the LBTT rate reflects the actual consideration, and therefore be able to make any necessary further payments and/or claims for refund. LBTT returns will be necessary at the end of the lease term and where leases are assigned.

The chargeable consideration in relation to leases includes rent and other monies such as a premium payable over the term of the lease. The amount of tax payable on the chargeable consideration that consists of rent which is payable by the tenant, is determined by calculating the net present value and applying the relevant tax rate to the NPV.

Rent deposits

A notable difference between the SDLT and LBTT systems can be seen in relation to rent deposits. Where any rent deposit by a tenant or a new lease or by an assignee taking an assignation of an existing lease will be treated as part of the consideration for the lease or assignation for LBTT purposes, if it exceeds twice the rent. The level of deposit therefore needs to be considered, as a relevant deposit paid to a landlord as part of an assignation will need to be considered in addition to any payment due to the assignor.

Licences to occupy

It is proposed that licences to occupy retail premises will also be within the remit of LBTT. This will be to ensure fair tax treatment between retail premises occupied under a lease and those occupied under a licence.

Points to Remember

• Although LBTT will not be operational until April 2015, it is relevant to transactions being concluded now but for which completion will be on or after that date. This relates to conditional purchase transactions subject to certain preconditions including obtaining landlords consent or planning permission. This is a factor that must always be remembered in such circumstances.
• Existing contracts which were entered into prior to 1 May 2012 will remain subject to SDLT and not LBTT.
• LBTT will be payable at the same time as submission of the tax return as part of the registration of title. The return must be submitted, and the tax paid, within 30 days of the effective date. Registration of Title will not be able to proceed unless the linked LBTT return is complete and the arrangements for payment of any tax have been made. This will hopefully serve to streamline the process.
• As far as leasing is concerned, continual assessment by placing an obligation on tenants to submit returns every 3 years. Any additional LBTT payable due to increase in rent is to be paid at time of submission of return. This additional administrative demands on tenants and their agents as the current system only requires one return which assesses up to the end of year 5 of a lease.
• LBTT will apply to Scotland based land regardless of where the purchaser is based.

Point to Note:

Changes have come into force in relation to SDLT and residential properties since the publishing of the blog article “Land and Building Transaction Tax – The Elimination of Stamp Duty Land Tax in Scotland” on 7 November 2014.

For the period from 4 December 2014 until 1 April 2015, when the new LBTT regime will come into force in Scotland, a new set of rules have been implemented, which will apply to residential property purchases in the UK over £125,000.

The old rules provided a single tax rate on the entire property price. In contrast, under the new rules the purchaser will only pay the applicable tax rate on the part of the property which falls within each tax band.

So for example under the old rules, if you bought a house for £185,000, you would have to pay 1% tax on the full amount, which would equal SDLT of £1,850. Since 4 December 2014, under the new rules, for the same property and price, no stamp duty will be applicable for the first £125,000, and 2% on the remaining £60,000, SDLT of £1,200. This works out as a saving of £650.

These changes do NOT affect commercial properties in Scotland.