The Land and Buildings Transaction Tax (LBTT)

LBTT replaced Stamp Duty in Scotland in 2015 under powers devolved to the Scottish Parliament, becoming the first new tax to be introduced by the Scottish Parliament in over 300 years.

The is now overseen by the Scottish Tax Authority Revenue Scotland rather than HM Revenue and Customs making it the largest national tax to be administered by Holyrood.

The change has had a significant impact upon commercial property in Scotland, in particular in terms of tax liabilities attached to a commercial lease, and obtaining specialist advice from a qualified and experienced commercial lease solicitor is highly recommended due to the complexity of the new system.

LBTT is only chargeable on non-residential (commercial and agricultural) leases and residential leases are exempt. Leases of 6 or more residential properties (such as care homes or student accommodation) are however treated as non-residential leases properties and as a result are LBTT chargeable.

LBTT on rent is current charged at 1% of the net present value (NPV) of the lease rentals (+ VAT if appropriate) that exceed the current rate band of £150,000.

The 2016 budget also introduced a new rate of SDLT for high value leases with a new 2% band applied to properties with a total NPV exceeding £5,000,000 – although the amount of NPV between £150,000 and £5,000,000 is still taxed at 1%.

You can calculate your own liabilities using a calculator on the Revenue Scotland website at – https://www.revenue.scot/land- buildings-transaction-tax/tax-calculator/lbtt-lease-transactions-calculator

LBTT is calculated in a substantially different manner to Stamp Duty. The later was  based on the rent for the first five years of the lease, with the highest rent in the first five years being used for year six onwards and with rent increases after year five exclude from calculations. With LBTT the NPV is based on the rent payable across the whole term of the lease and recalculated ever three years.

This can lead to increased liabilities, but also the possibility of refunds on payments in the event of rent decreases.

LBTT becomes payable on a lease transaction on the earliest of the below and in most cases must be submitted within 30 days.

  • the date on which first payment of rent is made;
  • the date on which the tenant takes entry to the property;
  • the last date of signing of the lease.

It is not possible to submit the return and pay the tax later, as was the case with Stamp Duty.

Following the initial LBTT return, further returns have to be submitted to Revenue Scotland:-

  • every three years;
  • when the lease is assigned;
  • when the lease terminates, expires or is forfeited.

Although returns have to be submitted more regularly under LBTT, the returns themselves and the rules governing them are simpler and require very little information relating to the lease.

Unlike Stamp Duty variations such as increasing the term or the rent of a lease are not treated as the granting of a new lease and instead the variation on rents is accounted for in later returns.

Where a lease ends or is renounce the outgoing tenant has to complete an LBTT return and pay any additional LBTT to Revenue Scotland. The incoming tenant assumes responsibility for future three yearly returns in relation to the lease. It is likely that the incoming tenant will require the outgoing tenant to warrant that they have paid any outstanding LBTT and provide them details of previous LBTT returns and the NPV calculations in order to allow the incoming tenant to manage future returns.

The most complicated aspect of LBTT relates to the transitional arrangements for lease transactions which straddled the implementation date of April 1 2015.

  • If Missives were concluded before May 1 2012 and not varied or assigned the property in question continues to be liable for Stamp Duty
  • If Missives were concluded and leases signed before the implantation date properties are liable for Stamp Duty but LBTT may become payable if the lease is assigned or varied.
  • If Missives were concluded before the implementation date but a formal lease signed on or after it the property is liable for LBTT.
  • If Missives were concluded, entry taken or rent paid before the implementation date but a lease signed on or after it the property is potentially for SDLT and LBTT
  • If Missives were concluded and the lease signed after the implementation date the property is liable for LBTT.

The transitional rules relating to leases can be confusing and complex, making specialist advice from a commercial lease solicitor specialising in Scottish tax law essential.