LBTT group relief: a retrospective fix

The Scottish Government has confirmed that a legislative “fix” for an anomaly in the land and buildings transaction tax (LBTT) legislation restricting access to group relief will be introduced, and will have retrospective effect.

Its introduction was announced in March 2018; however, the draft order giving effect to the change did not provide for it to apply retrospectively. Thankfully it has now been confirmed that the position will be rectified by primary legislation to ensure that the exemption has retrospective effect. 

LBTT v SDLT group relief

On 1 April 2015, the Land and Buildings Transaction Tax Act 2013 came into force, replacing stamp duty land tax (SDLT) in Scotland with LBTT. The stated intention of the Scottish Parliament was to align the two taxes so far as group relief was concerned, so that LBTT group relief should be available where SDLT group relief had previously been available. 

As a result, the group relief provisions introduced for LBTT largely replicated the SDLT provisions, allowing companies in the same group to claim relief from LBTT on most intra-group transactions, with some disqualifying provisions where group relief will not apply.

Both taxes contain disqualifying provisions which apply where, at the time of the transaction, there are arrangements under which someone could take control of the buyer but not the seller. 

However, the LBTT legislation does not contain an equivalent carve-out to cover unexercised security rights, putting companies that grant pledges to their bank as part of their security package at risk of losing out on group relief on intra-group transfers of property. This anomaly has arisen as a result of unfortunate timing, as the SDLT exclusion was introduced after the LBTT legislation was drafted.

What was the problem?

In December 2017, Revenue Scotland published a technical bulletin confirming that, in its view, LBTT group relief was not available on the transfer of a property from a parent company to its subsidiary, where there was a share pledge in place over the shares in the purchaser, but such share pledge did not extend to the shares of the parent or the vendor.

This decision came as shock to many businesses in Scotland which had been operating under the assumption that the exception that applied to SDLT had continued to apply under LBTT when it was introduced. 

The uncertainty resulted in a number of high-value transactions being put on hold pending clarification, and led to wide criticism from industry professionals on the basis that it was inhibiting commercial activity in Scotland and creating the impression that Scotland was not a “good place to do business”. Many stressed the urgency of the Scottish Government taking action to fix the position.

In March 2018, following consideration of this issue, the Cabinet Secretary for Finance announced his intention to introduce an exemption for share pledge type arrangements, mirroring the exemption available under SDLT.

Following consultation, the Scottish Government published the draft Land and Buildings Transaction Tax (Group Relief Modification) (Scotland) Order, confirming that from the date it came into force (30 June 2018), the existence of a share pledge or equivalent arrangement would not prevent group relief from applying to a land transaction within a corporate group, provided the right to call in the arrangement is not exercised.

Retrospective effect?

A question remained over retrospective application of the new measures. As the Government opted to amend the Act by way of secondary legislation, rather than introducing new primary legislation, its order only confirms the position moving forward (since secondary legislation cannot have retrospective effect). Companies that entered into intra-group property transfers in the interim period between the LBTT legislation coming into force on 1 April 2015 and 30 June 2018, were left wondering whether or not LBTT was payable on those transactions.

As this level of uncertainty was clearly unsatisfactory, many within the industry continued to apply pressure to the Scottish Government to take further action to clarify beyond doubt that group relief applies where share pledge arrangements are involved. On Wednesday 13 June, Derek Mackay confirmed to the Finance & Constitution Committee that the Government will bring forward legislation giving retrospective effect to the amendment order. 

This decision is a welcome outcome and should bring the LBTT legislation in line with the original policy intention.