LBTT: in with the new

The Professional Practice Team supports a number of committees within the Society. The Property Law Committee has been keeping an eye on developments in relation to the proposed new land and buildings transaction tax (LBTT), which will replace stamp duty land tax (SDLT) in 2015.
Although the Professional Practice team cannot give legal advice on matters of law, as this is outwith its remit, the team keeps up to date with legal developments and how they will impact on the profession in practice. 

Alison Mackay, a solicitor in the Professional Practice Team who was previously a commercial property solicitor in private practice, provides an update on the proposed new tax. 

Progressive application

The Land and Buildings Transaction Tax (Scotland) Bill was introduced into the Scottish Parliament on 29 November 2012 and received Royal Assent on 31 July 2013. The current UK tax payable on land and property transactions – SDLT – will no longer apply in Scotland from 2015, and will be replaced by the new LBTT. However, the Scottish Government does intend to adopt many of the features of the current SDLT system and build the new LBTT on its foundations.

From 1 April 2015, LBTT will apply to transactions involving Scottish property, both residential and commercial, irrespective of the outcome of the independence referendum. The tax will be levied where property is purchased or leased, and where other rights such as taking an option over land are granted.

One key difference is the way in which the tax will be applied. Unlike SDLT, a “slab tax” where once the price exceeds a particular threshold, the whole price (and not just the excess over the threshold) is taxed at the relevant rate, LBTT will be a progressive tax (like income tax), whereby slices of the price will be charged at different rates. The Scottish Government’s view is that LBTT should operate on a progressive basis, so that sharp increases in tax liabilities at the thresholds are avoided and liabilities increase more proportionately.

The LBTT rates and thresholds for commercial and residential properties have not yet been published. It is likely that the rates will be set in line with the prevailing economic circumstances when LBTT is introduced in April 2015.

Most of the reliefs and exemptions under LBTT will be the same as those under SDLT, but subsale relief will not generally be available. In general, licences are to be exempt from LBTT, but those which closely resemble leases, e.g. airport concessions and licences to carry out building works, will be caught.

The application of LBTT to commercial leasehold transactions mirrors the SDLT regime. The charge to LBTT will be based on the net present value (NPV) of the total rental payments, including VAT. Unlike SDLT, however, the NPV calculation will be based on the actual rents payable during the whole of the lease – SDLT ignored any rent increases after the first five years. Accordingly, LBTT returns for leases will need to be made every three years, with any additional LBTT or refund of LBTT payable when the returns are made.

Residential leases of 20 years or less will be exempt from LBTT, because the revenue from residential leases is low and will become even lower with the introduction of the Long Leases (Scotland) Act 2012, which allows conversion of long leases into ownership interests.
Contracts entered into before 1 May 2012 will still be subject to SDLT. Contracts entered into now will fall under the LBTT regime.

LBTT will be a self-assessment tax. The Scottish Government will establish a new Scottish tax authority, Revenue Scotland, which will oversee the administration of devolved taxes.

Revenue Scotland will work in conjunction with Registers of Scotland to set up systems to link the processes of payment of LBTT and registration of title. There is a proposal to design a new online system for simultaneous submission of the LBTT return, payment of the tax and registration of title.