Tax: Developments in LBTT law
By Donald Drysdale for ICAS
6 April 2018
Changes are being made to LBTT law; Donald Drysdale finds that they don’t go far enough, and wonders what the overall policy direction is meant to be.
Introduction
Three years ago, on 1 April 2015, Land and Buildings Transaction Tax (LBTT) replaced Stamp Duty Land Tax (SDLT) on purchases of residential and commercial property and leases of non-residential property in Scotland.
The LBTT legislation has proved influential, trailblazing a new ‘progressive’ rate structure in place of the old ‘slab’ structure of SDLT, but it has been found wanting in a number of respects. Revenue Scotland’s new LBTT Project Board is overseeing some key areas of work during 2018, but more changes are needed.
Additional dwelling supplement
Since 1 April 2016 an ‘additional amount’ – a 3% additional dwelling supplement (ADS) – has been payable when a buyer liable to LBTT owns two or more dwellings, except in certain cases where they are replacing their only or main residence.
This supplement was regarded as unfair in some circumstances, and on 30 June 2017 the Land and Buildings Transaction Tax (Additional Amount-Second Homes Main Residence Relief (Scotland) Order 2017 (SSI 2017/233) introduced relief from ADS where spouses, civil partners or co-habitants jointly buy a dwelling but the dwelling being replaced is owned by only one of them. It also provided for repayment of ADS where, within 18 months of spouses, civil partners or cohabitants jointly acquiring a dwelling to be used as their main residence and paying ADS, one or other of the joint buyers disposes of a dwelling that has been used by both of them as their main residence.
SSI 2017/233, being secondary legislation, could not be applied retrospectively. Accordingly, the Land and Buildings Transaction Tax (Relief from Additional Amount) (Scotland) Bill now before the Holyrood Parliament, proposes that retrospective effect be given to the new reliefs back to the inception of ADS. ICAS has welcomed this Bill.
Commercial leases
The rules for charging LBTT on the grant of a new lease are broadly similar to those for SDLT, but with one fundamental difference. SDLT liability on rent payable under a lease is finally determined by reference to the rent payable for the first five years. By contrast, the tenant under a lease in Scotland must review the LBTT liability, not only on assignation or termination of the lease but also every three years throughout its term, to self assess whether further tax is due.
Whether or not there have been any changes in rents or other lease terms, a three-yearly return must be submitted at the end of lease years 3, 6, 9 etc – in each case within 30 days after the relevant anniversary. Any additional LBTT due must be paid when the return is lodged. In some instances a refund may be due. As LBTT was introduced in April 2015, the first three-yearly returns are becoming due from April 2018 onwards.
Such returns may be submitted online using the Scottish Electronic Tax System (SETS) for solicitors and agents or a new lease review return for tenants, or using paper forms. Further information is available on the Revenue Scotland website.
This requirement to submit three-yearly returns will be onerous for some tenants, particularly those with multiple leases. Penalties may be charged for failure to submit a return, and interest and penalties may arise on LBTT paid late.
LBTT relief for first-time buyers
For SDLT, a relief for first-time buyers existed temporarily from 25 March 2010 until 24 March 2012. Now a new relief for first-time buyers paying no more than £500,000 has been introduced by Finance Act 2018 with effect from 22 November 2017, offering exemption from SDLT on consideration up to £300,000 and a rate of 5% on any remaining consideration up to £500,000. On a qualifying purchase this relief can reduce SDLT by up to £5,000, but beware of the cliff edge: an extra £5,000 of tax becomes payable when the consideration exceeds £500,000, even if only by £1!
Faced with the new relief for first-time buyers south of the border, the Scottish Government committed to introducing such a relief in Scotland from June 2018 and has consulted on this. At present LBTT is payable on the purchase of a dwelling for more than £145,000, and the proposed relief would raise this threshold to £175,000 for first-time buyers – saving them tax of up to £600.
This LBTT consultation has now closed. The ICAS response questions the need for the new relief, arguing that it may well simply increase the price of a first-time purchase by up to £600. It also asks whether the added complexity of the relief is justified.
Other ICAS concerns
Group relief
Last October ICAS submitted representations drawing attention to aspects of LBTT law which produce commercial outcomes that differ from those under the SDLT regime, placing Scotland at a competitive disadvantage compared with the rest of the UK
The Scottish Government was asked to clarify its policy regarding the availability of LBTT group relief where shares in a subsidiary company are pledged as part of security arrangements. Unlike SDLT, and Land Transaction Tax (LTT) in Wales, LBTT law doesn’t include provisions to prevent such security arrangements from denying group relief.
Similarly, where a property is transferred out of a trading company to another group company in a demerger prior to disposal of the trading company, HMRC would grant relief from SDLT but Revenue Scotland would not grant relief from LBTT.
Thankfully the Scottish Government listened, and conducted a consultation on LBTT group relief which closed on 13 April. The outcome of this is now awaited.
Pension scheme transfers
Commercial property transactions relating to pension scheme transfers have always been outside the scope of SDLT but within the scope of LBTT. This could have discouraged investment in commercial property in Scotland, with wider implications for the Scottish economy.
Following representations, Revenue Scotland has agreed that debt in the form of a liability assumed to pay benefits to pension scheme beneficiaries will not generally be considered as chargeable consideration in relation to such transactions. However, any consideration given in the form of money or money’s worth for the transfer of the properties will be chargeable to LBTT.
Seeding reliefs
For SDLT purposes, specialist seeding reliefs were introduced in 2016 to facilitate onshore collective investment in property through Property Authorised Investment Funds (PAIFs) and Co-ownership Authorised Contractual Schemes (COACS). The absence of similar reliefs for LBTT means that Scottish properties within a UK portfolio may be excluded from transfers into these collective investment regimes.
LBTT changes
The piecemeal way LBTT law is amended raises concerns that there is no regular procedure for updating and maintaining Scottish taxes. At Westminster, an annual Finance Act provides a mechanism for amending UK tax law as required. That may not be precisely what is needed at Holyrood, but there should certainly be a regular parliamentary process for updating and amending devolved taxes when necessary.
Copycat antics
Fiscal devolution promised us a brave new world, but it seems unclear what part LBTT has to play in delivering this.
Initially modelled very closely on the SDLT legislation, LBTT was launched with a fanfare when it differentiated itself from SDLT by adopting a progressive rate structure. This was welcomed so much that SDLT was subsequently amended to become a progressive charge.
In November 2015, when the UK Government proposed a 3% supplement to SDLT on second homes, the Scottish Government followed suit with ADS. Now the UK Government has introduced a new SDLT relief for first-time buyers, and the Scottish Government intends to mirror this for LBTT – but on a more meagre scale.
If both governments are so intent on keeping their tax rules in step, is the costly process of administering similar but subtly different taxes benefiting society, or is it simply imposing unwanted complications and costs on a confused taxpaying public?
Article supplied by Taxing Words Ltd