Consultation response by Brodies LLP

Question 1: Do you agree that the draft instrument will achieve an outcome consistent with the equivalent group relief arrangements available under SDLT?


We welcome the intent of the draft instrument in remedying what appears to be an oversight in the LBTT group relief legislation. However, we have concerns over its effectiveness and elements of the drafting.

Our key areas of concern are:

A. Jurisdictions

The draft instrument only addresses security arrangements under Scots law and under the law of England and Wales. We suggest that it should also cover security arrangements in other jurisdictions. This would be a sensible addition as the definition of an LBTT group is not restricted to companies resident in the UK. Some LBTT groups will contain companies in non-UK jurisdictions which are subject to security arrangements under the laws of those jurisdictions. There does not appear to be a compelling policy reason for excluding transfers to such companies from LBTT group relief.

This would allow LBTT group relief to apply where there are security arrangements, whatever the residence of the company in question, the source of the borrowing, or the legislation applying to the security arrangements.

B. Types of security

The aim of the draft instrument is to amend the LBTT legislation so that security arrangements do not prevent LBTT group relief applying on the transfer of property intergroup and that such arrangements are "carved out" from the types of arrangements which deny LBTT group relief.

The draft instrument only appears to include Scottish arrangements 'analogous to a pledge', and excludes "rights in security" from the carve-out. It is unclear to which arrangements this drafting is intended to apply, or whether it would capture a Scottish share pledge (which is, strictly speaking, not a formal right in security or a pledge, but a transfer of ownership).

We would favour deletion of the exclusion of "rights in security", as this exclusion is inconsistent with the proposal by the Scottish Law Commission to introduce a proper form of right in security (i.e., a genuine subordinate real right) over immoveable property such as shares. [1]

We consider that the drafting should be broadened to any right in security over shares, including transfer of shares in security. This would ensure that all relevant securities and equivalent arrangements such as share pledges were captured, and would be flexible enough to cope with changes in law and practice.

C. Some restrictions may prevent the legislation from achieving Scottish Government's stated intention

New paragraph 3A(1)(b)(i) of Schedule 10 states that the carve-out will not apply if there have been circumstances in which a bank could have exercised its rights under the security arrangement but did not. In practice, a technical breach of security arrangements might occur without a bank seeking to exercise its rights. Group relief should not be denied in these circumstances.

Paragraph 3A(1)(b)(i) also presents a practical issue. It would be extremely difficult assess whether group relief was available, as situations could have arisen where a technical breach had occurred but a lender did not exercise its rights. Banks do not always use all remedies available to them where there have been defaults.

Paragraph 3A(1)(b)(ii) is states in respect of Scottish securities that the carve-out will only apply if the bank has transferred the shares back to the borrower. As a Scottish share pledge generally involves ownership of the shares residing with the lender until the secured debt is repaid, this condition would prevent draft SI from meeting its objectives, as it would block group relief in situations where a Scottish share pledge is in place.

We would therefore propose that the conditions at paragraph 3A(1)(b)(i) and 3A(1)(b)(ii) are deleted.

Question 2: Do you consider that the proposed amendment to the legislation will reduce the effectiveness of existing arrangements or result in any new areas of potential tax avoidance?


The transactions that the SI would allow to benefit from group relief are everyday business transactions which do not carry a higher risk of tax avoidance, for example, property acquisitions and the refinancing of corporate groups.

Share pledges, floating charges and (outside of Scotland) fixed charges over shares form part of most security packages. Granting these kinds of securities is a standard feature of most transactions where external lending is obtained. The new measures should ensure that group relief applies in in line with the intention of the Scottish Government and the expectations of clients and advisors in Scottish transactions.

The general anti avoidance rule in the Revenue Scotland and Tax Powers (Scotland) Act 2014, and targeted anti avoidance rules in the LBTT legislation will continue to apply. In particular, one of the conditions of group relief is that a property transfer is made for bona fide commercial purposes and not for the avoidance of tax.

Question 3: Do you have any other comments, not covered by the previous questions, on the draft legislation?


We do not think it is appropriate for the types of situations which are addressed by the draft instrument to be defined in terms of English law, in particular by using the term 'mortgage'. We believe that these amendments to the LBTT legislation should be drafted using Scots law definitions, particularly given the Scottish Government's clear objective of aligning the LBTT legislation with Scots law and practice.


We very much welcome the introduction of the instrument to deal with future transactions.

We believe it is very important for such changes to have retrospective effect from the introduction of LBTT on 1 April 2015. We acknowledge that this cannot be achieved through secondary legislation, and primary legislation would be needed. We also acknowledge that there are significant demands on the time of the Scottish Parliament, and serious consideration should always be given to introducing tax legislation with retrospective effect.

In this instance, we consider the case for retrospective effect is clear cut:

It appears to have always been the intention of the Scottish Government for LBTT group relief to be available on intercompany transfers, even where security arrangements are in place. LBTT legislation which blocks group relief on such transactions occurring between 1 April 2015 and the date of the new SI takes effect does not reflect this policy intention.

It is in line with the four principles of Adam Smith which underpin the policy of the devolved Scottish tax system. Specifically, that of clarity. Tax payers should (rightly) expect that the application of Scottish tax law in practice clearly and consistently reflects the policy intentions of the Scottish Government.

As noted above, security arrangements are a common feature of commercial groups, so a large number of intergroup transfers will have taken place where both group relief has been claimed and share pledges are in place. In all of these cases taxpayers will have claimed group relief as it was never anticipated that the LBTT legislation would be applied so as to deny group relief in such cases. This is therefore likely to be an issue for a substantial number of Scottish tax payers.

If the LBTT legislation is not changed retrospectively, taxpayers who have undertaken inter group transfers of property and claimed group relief where there are share pledges in place will face tax charges, penalties and interest. The tax charges could be significant, as the value of property transferred inter group can often be very significant. This does not seem a fair or appropriate way to treat taxpayers given that when LBTT was introduced the Scottish Government's policy intention was that group relief would operate in a similar way to the relief for SDLT.

It helps to meet the objective of the Scottish Government that "Scotland remains an important and attractive place for companies to locate and invest in" (see paragraph 10 of the Consultation document). It is inevitable that with any new tax, or tax system, there will be teething difficulties that are to be addressed. By fully addressing these difficulties, it sends a signal that the Scottish Government is committed to developing a tax system which works for businesses and tax payers.

Introducing primary legislation to give these changes retrospective effect is beneficial to Scottish tax payers. This is an important distinction from situations where retrospective legislation could disadvantage tax payers, which rightly requires additional justification. It is not uncommon for governments to introduce legislation with retrospective effect where such legislation is intended to remedy unintended consequences of existing legislation.

Question 4: Do you think that the legislation will, in any way, impact upon equal opportunities, human rights, businesses, island communities, privacy and/or sustainable development in Scotland?

We have no comments on this question.

[1] Scottish Law Commission, Report on Moveable Transactions, Volume 2: Security over Moveable Property, SCOT LAW COM No 249 (December 2017)


Isobel d'Inverno

Director of Corporate Tax