LBTT and Scottish leases

Ten years ago, on 1 April 2015, the Land and Buildings Transaction Tax (LBTT) replaced Stamp Duty Land Tax (SDLT) on transactions involving the purchase and lease of land in Scotland.

LBTT is a fully devolved tax. Therefore, the Scottish Parliament has control over all aspects of the tax,  including the tax base, reliefs and exemptions (rather than just the rates and bands). Because LBTT is fully devolved, it has been possible to make some aspects of the legislation, such as the LBTT regime for Scottish leases, more closely aligned with Scots law and conveyancing practice. 

Difference between English and Scottish leases

The LBTT lease regime reflects the different nature of leases in England and Scotland. In England, the grant of a lease is the grant of an estate or interest in land, whereas in Scotland a lease is a contract. This means that Scottish leases can be varied or extended in ways that are not possible for English leases. Dealing with variations and extensions of Scottish leases under the SDLT regime, which was based on English property law, could be quite challenging. 

LBTT returns 

LBTT is administered by Revenue Scotland (the Scottish tax authority). LBTT returns are submitted to Revenue Scotland using the online Scottish Electronic Tax System (SETS).

Initial LBTT return

Both SDLT and LBTT are based on the net present values (NPV) of the rents under a lease, discounted at 3.5%, with tax payable to the extent that the NPV exceeds a nil rate band of £150,000. LBTT is based on the actual rent paid in every year of the lease, whereas the SDLT charge is based on the rent in the first five years of a lease.

The aim of the LBTT lease regime is that LBTT is paid on the rent actually paid under the lease. In the initial return, which is submitted when the lease is granted, the rent payable in each year of the lease has to be included, using estimated rents if necessary.

Three yearly LBTT lease review returns

LBTT lease review returns then have to be submitted every three years throughout the term of the lease. In the review returns, estimated rents are replaced by the actual rent paid, and the NPV is recalculated. If more LBTT is payable, this has to be paid to Revenue Scotland, and, if less LBTT is payable, a repayment is made by Revenue Scotland. Review returns have to be submitted to Revenue Scotland every three years even if the rent has not changed, and no LBTT is payable or repayable.

Penalties for failure to submit LBTT lease review returns

Penalties can be charged for failure to submit three yearly lease review returns, even if no LBTT is payable. The maximum penalty is £1,600. This is not a small amount, particularly where a tenant has multiple leases for premises in Scotland which all require separate review returns and incur separate penalties. If LBTT is payable on a review return, late payment penalties can also be charged.

Termination return

Tenants also have to submit a lease termination return at the end of the term of the lease or when the lease terminates for any other reason. For example, because the lease has been renounced (surrendered) early. Where a lease is terminated early, a repayment of LBTT can be claimed.

Assignation return

When a lease is assigned to another tenant, the outgoing tenant has to submit a lease assignation return, which "trues up" the LBTT payable up to the time of the assignation. The incoming tenant then takes over responsibility for submitting the LBTT lease review returns.

Variations and extensions of LBTT leases

There is no need to submit an LBTT return when an LBTT lease is varied or extended - the increase in the rent or the term of the lease is simply included in the next three yearly return (or assignation return / termination return if the lease is assigned or terminated before the next 3 yearly return is due).

Extensions and variations of SDLT leases

The three yearly review system simplifies the position for leases granted on or after 1 April 2015, although the review return regime can be onerous. Dealing with SDLT leases which were granted before the introduction of LBTT (i.e. before 1 April 2015) is, by contrast, not straightforward.

If a lease of premises in Scotland which was previously within the SDLT regime (i.e. it was granted before 1 April 2015) is extended, this is treated as the grant of a new lease for LBTT purposes (referred to as a "deemed LBTT lease"). An LBTT return has to be submitted for this new deemed LBTT lease, and the deemed LBTT lease is then subject to the 3 yearly review return system. 

An increase in the rent of an SDLT lease in the first five years of its term was also treated as the grant of a new lease for LBTT purposes, though this is no longer an issue since it is now more than 5 years since LBTT was introduced.

Extensions of stamp duty leases

The treatment of extensions of stamp duty leases is not wholly clear. Stamp duty applied in the UK (including Scotland) until the introduction of SDLT on 1 December 2003. Stamp duty and SDLT are separate taxes, despite sharing a very similar name. 

It was clearly the intention of the Scottish Government for extensions of stamp duty leases to be subject to LBTT, but there is a position that this treatment is not supported by the LBTT legislation. It is understood that a Tribunal case dealing with this very point was heard by The First-tier Tribunal for Scotland Tax Chamber in 2024, though the judgement has yet to be published.

Review of LBTT

The Scottish Government announced at the Scottish Budget 2024 that a review of LBTT is to be carried out during 2025. This review is expected to lead to recommendations for change which will be considered by the next Scottish Parliament following the Scottish Parliament elections which are expected to be held no later than May 2026. One of the areas under consideration is the 3 yearly lease review system. 

If you need help with LBTT and Scottish leases, get in touch with one of our expert corporate tax lawyers.