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Article:

New charges on leases under Scotland’s LBTT

31 May 2018

Land and Buildings Transaction Tax (LBTT) replaced Stamp Duty Land Tax (SDLT) in Scotland from 1 April 2015. LBTT covers all purchases of residential and commercial land and buildings including non-residential leases. New rules for non-residential leases took effect from 1 April 2018.

 

LBTT on leases

Broadly, LBTT is payable within 30 days of the effective date of any non-residential property lease where any lease premium paid, and the net present value (NPV) of the lease is in excess of the LBTT threshold (currently £150,000). The NPV is calculated using the total rent payable throughout the period of the lease. LBTT can also apply to certain residential property owned on a leasehold-like basis.

 

Lease reviews – Requirement from 1 April 2018

From 1 April 2018, tenants who filed an LBTT return under the LBTT regime (from 1 April 2015) are now required to review the lease in place, and file an additional return within 30 days of any of the following events: -

  1. On every three year anniversary of the effective date of the lease
  2. On the assignation of the lease to another party
  3. On the termination of the lease.

LBTT is calculated using the rates and bands in place at the effective date of the lease, and any additional tax which arises is payable within 30 days of the event.

 

Current LBTT rates on leases

The following tax rates and bands apply to premiums paid under leases:

Premium

LBTT Rate

Up to £150,000

0%*

£150,000 - £350,000

3%

Over £350,000

4.5%

*Where the average rent is £1,000 per annum or more, the nil rate band does not apply to the premium paid. In this instance, any premium paid up to the £350,000 level will taxed at the 3% rate.

The following tax rates and bands apply to the net present value of the rent payable under the lease:

NPV of rent

LBTT Rate

Up to £150,000

0%

Above £150,000

1%


Example

A five-year lease was created on 1 June 2015. The terms of the lease provided for rent of £60,000 per annum. LBTT of £1,209 was payable.

The three-year anniversary review date is 1 June 2018. The actual rent paid in the first three years, and projected going forward is £65,000 per annum. The revised LBTT due is £1,434. As £1,209 was paid at the date of the original transaction, a further £203 is payable on the three year review return.

 

Non-residential leases created prior to 1 April 2015

Non-residential leases (and certain residential property owned on a leasehold-like basis) in relation to Scottish property created prior to 1 April 2015 (under SDLT rules) are also subject to the new LBTT rules where there is any variation to the terms of the lease after 1 April 2015. This includes an increase to the annual rent payable.

LBTT returns are required every three years regardless of whether or not there have been any changes to the lease in place, or if there is any further tax to pay. Where it is calculated that less tax is payable, a claim for repayment can be made.

Penalties and interest can apply on the late filing of a LBTT return, as well as late payment of LBTT.
 

Next Steps

Tenants should ensure that they are aware of the three-year anniversary date applicable to them, as well as the requirement to report any changes to the current leases in place that may trigger the requirement for a LBTT return.

If you have any questions on this or any other tax issue, please contact James Paterson.

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