Key message: tenants whose leases are being varied or coming to an end may qualify for a refund of some or all of the LBTT paid in respect of the lease. Brodies can assist tenants and advisors in ensuring welcome tax refunds are fully claimed when due.
If your lease is ending, the chances are tax won't really be on your mind – and why would it be, even at the best of times? But – Scottish tenants – please do spare it a thought. Dealing promptly with the LBTT consequences of varying or ending a lease could result in a tax refund and some welcome extra cash.
When will a refund arise?
Broadly: if you have paid LBTT on the rents for your lease, a refund may be due if you are varying the lease to reduce the term, reduce or waive the rents, terminating the lease, or even if the lease is ending through irritancy. A refund may also arise if you have had to estimate your rents (for example, because you have a turnover lease) and your estimate turned out to be too high.
How would I claim it?
It depends on what you are doing now. Leases on which LBTT is payable are subject to ongoing LBTT reporting and tenants must recalculate their LBTT and submit a new LBTT return at periodic intervals – within 30 days of:
Every third anniversary of the original LBTT return (usually the grant of the lease);
Whenever the lease is assigned; and
When the lease comes to an end.
At each of these points, the LBTT on a lease is recalculated based on the facts at hand. If the rents have gone up, or the lease is extended, you will have more LBTT to pay; if they go down, or the lease is shortened, then you will be entitled to a refund.
The following examples all assume that the leases are liable to LBTT, and a return has been submitted already.
I am varying the lease to agree a rent free / waive or reduce rents / shorten the term.
In this case, you may not qualify for a refund immediately. Instead you will pick up the changes in your next three-year lease review return (or assignation / termination return if it falls sooner). Ensure you mark the date your next three-year review return is due (or check with your solicitor if you aren't sure). Keep a record of any agreements with the landlord to waive rent payments, and any other adjustments, as these will be factored in when calculating the rent paid and could result in an LBTT repayment.
I have a turnover lease / pay variable rents.
At the outset of the lease, your LBTT will have been based on estimated rents. If your actual turnover falls below the projections, or if you need to revise down your projections for future years, then this can be picked up in your next three yearly review return. As above, double check when your next return is due and keep a note of any adjustments.
My lease is ending.
If your lease is ending – by whatever means: you are exercising a break clause, agreeing an early termination, or the landlord serves a notice to quit, or irritancy – then an LBTT termination return is due within 30 days of the end date of the lease. The LBTT due in the termination return, is based on the actual rents payable to the actual end date of the lease. No LBTT is payable in respect of "wasted years" - if the actual period of occupation is less than the lease's original term.
Variation and assignation.
You may be negotiating a variation to your lease and then assigning it. Sometimes this is dealt with in a single deed of variation and assignation. If the variation is likely to give rise to an LBTT saving, make sure the it is clear in the deed that the variation is occurring before the assignation takes place. That way you can recoup the LBTT saving in the assignation return. If the variation occurs after the assignation, then the new tenant will be entitled to recover the LBTT instead – they will get a refund of the tax you have paid.