Stamp Duty Land Tax (SDLT) will cease to apply in Scotland from April 2015, writes Raymond McCombie, Senior Solicitor, based at Kinnear & Falconer, Stonehaven, and will be replaced by a new Land and Buildings Transaction Tax (LBTT).  Resulting from powers available to the Scottish Government under the Scotland Act 2012, SDLT will end in Scotland and the Scottish Government has power to design and manage their own replacement taxes and to retain the revenue raised.

The Land and Buildings Transaction Tax (Scotland) Bill was introduced on 29^th November 2012.   It was the first use of the Scottish Government’s powers under the Scotland Act 2012.   Following introduction of the Bill there was an extensive consultation with stakeholders with a commitment to set a simpler, fairer tax more aligned to Scottish property law than SDLT and which is less open to abuse.  The new Land and Buildings Transaction Tax was broadly welcomed by those involved in the consultation but there will inevitably be winners and losers in areas where the new system departs from the existing SDLT regime.   The Bill was subsequently passed and is in fact the first tax bill to be passed in Scotland since 1705.   The Land and Buildings Transaction (Scotland) Act 2013 (The Act) received Royal Assent on 31^st July 2013.  It was Scotland’s Finance Secretary, John Swinney, who introduced the Bill into Parliament and described the move to the new Land and Buildings Transaction Tax as an “innovative approach to taxation which is much better aligned with the Scottish market, with Scots law and practices, and the principle of progressive taxation.”  Mr Swinney claims that the legislation will be more efficient and less costly than the UK Government’s SDLT approach.  Time will tell…

Practitioners will be relieved to learn that The Act borrows heavily from the current SDLT legislation contained within the Finance Act 2003.   However, there are a number of notable differences some of which are noted below:-

A Progressive Tax

The current SDLT “slab” based system has been criticised for creating a distorted market around the present thresholds.  The Act introduces a progressive tax with a nil rate band and at least two other band thresholds.   Where the chargeable consideration exceeds a threshold the rate is increased only in respect of the excess.  The purpose is to avoid the present bunching of prices around the thresholds and it is hoped that it will discourage the use of schemes aimed at avoiding certain rates.   However, concerns have been raised from those involved with commercial property that the progressive nature of the tax will inevitably lead to increased tax for those operating at the upper end of the market.  As a result, commentators fear that Scotland could become a less attractive location for property investment and development.  It is therefore imperative that the Scottish Government take these factors into account when setting the rates, but it is difficult to see how an increased overall tax liability for those at higher levels can be avoided.  It is noted with interest that the thresholds and rates will not be decided until the end of September 2014 and the reader may draw their own conclusion for the timing of the announcement!

What is covered by LBTT

LBTT will apply to land transactions where the land or property is located within Scotland.  The definition of a land transaction is similar to that under SDLT and like SDLT there are to be certain exceptions.  One notable difference is that licences will not be excluded from the scope of the tax.

Leases

The tax charges will be based on the net present value of lease rentals but will use the actual rents rather than the highest rent for the first five years.  Three yearly reviews will be required in order to assess whether further tax is payable or a repayment due.   The tax position will also need to be revisited on termination or assignation of the lease.   Residential leases will be exempt other than qualifying leases under the Long Leases (Scotland) Act 2012.

Reliefs and Exemptions

In order to reduce the scope for avoidance and better tailor the system to Scottish requirements, some of the existing reliefs under SDLT will be removed.   The most contentious is likely to be the withdrawal of sub sale relief.   This relief is perceived to be a significant form of avoidance but its removal will cause disappointment for many property developers operating in Scotland in an already difficult market.

Anti Avoidance

SDLT has proven to be a tax commonplace for avoidance activity ranging from simple allocations of consideration to more complex schemes involving off-shore entities and trust arrangements.   The Scottish Government aim to learn from the problems which have arisen under SDLT and propose that avoidance be dealt with by a move away from the slab tax system, modification and/or removal of certain reliefs and exemptions, providing clear guidance as to the policy intention of reliefs, and the inclusion of both targeted anti avoidance rules and a general anti avoidance rule.

Revenue Scotland and Collection of LBTT

LBTT will be administered by a new tax authority, Revenue Scotland.  Revenue Scotland will not deal with the day to day collection of LBTT.  This will be delegated to the Registers of Scotland which will collect the tax when dealing with registration of title to property or land.  Tax payers will be required to pay LBTT within 30 calendar days of the effective date of the transaction.  Land and property will not be able to be registered in the Land Register or Books of Council and Session until arrangements “satisfactory to the tax authority” have been made for payment of LBTT.

Transitional Rules

LBTT will apply from April 2015 subject to transitional rules.   A transaction pursuant to a contract entered into on or before 1st May 2012 will remain subject to SDLT, unless the contract is varied, the transaction is an exercise of an option or similar right or there is an assignation or sub sale.    A transaction pursuant to a contract entered into and substantially performed on or before 1st May 2012 will also remain subject to SDLT.

Conclusion

As the thresholds and rates of tax are yet to be decided, it is not clear what overall impact LBTT will have on the Scottish property market.   LBTT does provide an opportunity for the Scottish Government to create a system which is more fit for purpose in Scotland than SDLT although it will be imperative that LBTT is implemented in a way which doesn’t result in Scotland becoming a less attractive place to do business.  Those advising on transactions involving land and buildings in Scotland should keep a close eye on developments and ensure that their clients are aware of the change in regime, particularly where it could apply to completion of contractual arrangements which are entered into at the present time.

Should you require further information please get in touch with your usual contact at James and George Collie.