This is a follow-up to last month’s BPU on Land and Buildings Transaction Tax (“LBTT”) at the end of which it was said:
“As far as [many aspects] are concerned LBTT has largely followed the approach taken in the UK “stamp duty land tax” legislation [i.e. the equivalent to LBTT which still applies for the rest of the UK]. The only substantial innovation which has been introduced to the Scottish legislation is to have a rolling review every three years of tax payable against actual rentals.”
This BPU focuses on this requirement for a three-year rolling review of LBTT for commercial leases.
Who needs to make a further LBTT Return?
- In general leases of residential property are exempt from LBTT. So they are not subject to the three-yearly LBTT returns régime.
- But some residential type property nevertheless counts as being “commercial” for LBTT purposes e.g. leases of six or more residential properties or student accommodation.
- Any tenant with a lease of commercial property in Scotland – including property which counts as “commercial” for LBTT purposes – has to submit three-yearly LBTT returns.
- This will include not only LBTT leases granted after 1 April 2015 – when LBTT was first introduced – but also extensions and variations of leases which were originally subject to the UK stamp duty land tax. That’s because the extension or variation of a lease which was originally subject to stamp duty land tax are treated as the grant of a new lease for LBTT purposes and so fall within the three-yearly return regime.
- A return is also required when a lease terminates for any reason or where it is assigned (transferred).
When does a Return have to be made?
- The first LBTT leases were granted in April 2015. That means the earliest three-year review date is April Fool’s Day 2018.
- Returns have to be made within 30 days from the “review date”. This is three years from the effective date of the original lease. Any additional LBTT has to be paid when the further return is submitted.
- Similarly, the returns which tenants are required to submit for assignations (transfers) and terminations of leases also need to be submitted within 30 days of the assignation or termination date.
How do tenants make a further return?
- Although solicitors submit most LBTT returns, tenants themselves will be able to submit three-yearly returns online. There will also be a paper review return. The Revenue Scotland website contains helpful information on this https://www.revenue.scot/land-buildings-transaction-tax/leases/how under the following headings:
- How to make an online LBTT lease review return (agents)
- How to make an online LBTT lease review return (tenants)
- How to make a paper LBTT lease review return
- How to pay LBTT
What must the review return contain?
- The review return has to include the revised “net present value” (“NPV”) of the lease rentals based on the actual rent paid in the first three years of the lease, and if appropriate revised estimates of the rent in the remaining years of the lease. (For a brief outline of the term “net present value” see last month’s BPU.)
- For LBTT, the NPV calculation for a lease is based on the rent in all the years of the lease, not just the first five years, as is the case for stamp duty land tax. The initial LBTT return for the lease is likely to include estimates of the rent payable in the later years of the lease.
- The aim of the three-yearly review process is to ensure that over the term of the lease, LBTT is paid on the rent actually paid.
- The review return must also include the amount of additional LBTT payable to Revenue Scotland, or the amount of any refund due to the tenant.
- The LBTT lease calculator https://www.revenue.scot/land-buildings-transaction-tax/tax-calculator/lbtt-lease-transactions-calculator has also been updated to include a box for the LBTT already paid, so that the calculator can show the additional LBTT payable, or the refund due, in relation to a further return.
How does a tenant know they are required to make a review return?
- Revenue Scotland is sending out reminders to tenants approximately three months before the review date. The first reminder letters were issued at the beginning of February 2018, and there will be a rolling programme of reminder letters from now on.
- Even if no reminder letter is received, the tenant is still obliged to submit a review return. Tenants should therefore review their leases to check whether a three-yearly return is required.
- There is extensive guidance on the Revenue Scotland website including a leaflet entitled “Important tax changes for commercial leases”: https://www.revenue.scot/sites/default/files/Important%20Tax%20Changes%20for%20Commercial%20Leases%20%20Information%20Leaflet.pdf
What if a tenant has taken an assignation of a lease?
- Where a lease is being assigned (transferred), it is the outgoing tenant who has to make a review return in respect of the assignation (transfer).
- After the assignation (transfer), the incoming tenant assumes responsibility for submitting the three-yearly returns.
Note: This material is for information purposes only and does not constitute any form of advice or recommendation by us. You should not rely upon it in making any decisions or taking or refraining from taking any action. If you would like us to advise you on any of the matters covered in this material, please contact Joyce Moss: firstname.lastname@example.org