What is the LBTT Review?

Under the existing LBTT legislation, residential property is effectively any dwelling together with its garden and grounds and any other buildings on that land. Non-residential property is everything else. The residential rates of LBTT are significantly higher than the non-residential ones.

However, if the subject matter of a transaction includes any elements which are not residential (or if a series of linked transactions includes a non-residential transaction) then the entire subject matter of the transaction (or series of transactions) is treated as non-residential.

This has led to significant litigation in England in the last few years as a high number of claims have been made for mixed use / non-residential treatment – of which only a small number have been successful. The UK government, after consulting on the matter decided to leave the mixed property rule in SDLT untouched (much to the surprise of a number of tax professionals).

One likely possibility is that the Scottish Government replaces the mixed property rule with an apportionment rule – so where a property has both residential and non-residential elements the price is split between them with each element taxed at the appropriate rate. A similar rule already exists for the purposes of the Additional Dwelling Supplement (or ADS) which is still payable on the “dwellings” element of non-residential transactions unless specific reliefs apply. Certain claims for multiple dwellings relief also require an apportionment between the residential and non-residential areas.

While this is a highly likely outcome it is not without difficulties: is a specific basis of apportionment to be used (the default is “just and reasonable”)? Will there be de minimis thresholds at which a property is all residential or non-residential? How will an apportionment rule interact with MDR and the six pack provisions?

It is hard to predict what will happen here. The UK government abolished SDLT MDR as of summer 2024. The Welsh Assembly has decided to retain the relief, but to tighten its application so it cannot be claimed if a buyer is also claiming a subsidiary dwelling exemption from the Welsh equivalent of the ADS (colloquially, the “granny flat relief”).

The SDLT position is tricky because, under the post-Smith Commission Fiscal Settlement between Holyrood and Westminster, retaining by retaining MDR the Scottish Government is effectively costing itself money twice: once through a reduction in tax revenues; and then again through an adjustment to the block grant it receives (and which is still the primary source of Scottish Government funding). This is explained in more detail: here.

Unlike the Welsh LTT, there is no subsidiary dwelling relief in the LBTT ADS, so the Welsh approach isn’t in and of itself an option unless an ADS granny flat relief is introduced. In fact, in many cases where a house with a granny flat (or other small attached dwelling) an MDR claim can effectively act as a granny flat relief by heavily mitigating the impact of the additional ADS charge.

We therefore hope that MDR Is retained in something like its current form. By reducing the purchase costs of commercial housing (e.g., BTR flats or modern student accommodation) the relief effectively contributes to higher yields for investors which helps boost the attractiveness of these assets. It may be that there is a case for small tweaks however – for example, removing the ability to rely on non-residential rates and MDR, or correcting for the mixed property anomaly can result in the ADS being paid on non-residential land in some MDR claims.

Under the “six pack” rule, six dwellings purchased in a single transaction are deemed to be non-residential. This is – potentially – a far more valuable rule for investors in commercial housing than MDR as most BTR or student accommodation schemes would qualify, and in some cases an MDR claim would result in higher tax than just relying on the non-residential rates. It is also valuable to registered providers of affordable housing in cases where they don’t qualify for the relatively strict social housing reliefs or charities relief.

The rule cuts both ways too. Because residential leases are generally outside the scope of LBTT, the six pack rule effectively brings leases of commercial housing developments back in to the tax charge. Without it (or without some similar rule) such leases would be exempt.

In our view, it’s correct that if the tax system is to distinguish between residential and non-residential property then there ought to be a point where the system recognises that a sufficient bulk of residential property purchases is in fact commercial in nature.

Potential changes could include increasing the threshold from six to a higher number (say ten), or making the application of the six pack rule provisional on future commercial use (LBTT already has several provisional reliefs: group relief, development sub sale relief and multiple dwellings relief for example, can all be withdrawn in set time periods).

This relief is worth, at the maximum, c. £600. While that may seem insignificant in the wider context of LBTT, it’s not to be neglected either. Given for most first-time buyers they will be funding the LBTT payments and deposit out of savings, any saving ought to be welcome: it’s more money for the deposit, furnishings, moving expenses – the list goes on.

Sadly, the relief is also unduly complex as it borrows heavily from the hodgepodge of deemed ownership rules that make up the toxic gumbo which is the ADS. In our experience, the cost of properly advising on the relief in some cases can quickly outweigh the savings.

Our (unlikely) preference would be to see an expansion on the relief so it is potentially worth more, and a heavy simplification of the qualifying rules.

This is the “wait and see” option because: (i) as far as we are aware, this will be one of the first studies in how LBTT currently interacts with the Scottish Government’s net zero agenda; and (ii) there aren’t any specific measures aimed at net zero initiatives (aside from excluding woodland planting and any renewables other than windfarms from development sub-sale relief), so any steps in this area would likely require the introduction of new law or incentives in the form of reliefs.

It is also tricky because under the Scotland Act 1998 the Scottish Government cannot introduce free standing environmental taxes other than those administered at a local level (and some organisations have pushed for – for example – local authority carbon taxes).

The question of using LBTT to supplement environmental policy measures has been considered by the Scottish Land Commission. In 2022, their advice to Scottish Ministers considered introducing a new surcharge (akin to the ADS) for large holdings of Scottish land (see page 11 here). They reiterated this position in their March 2026 advice (which also significantly rowed back on the prospect of carbon taxes).

So, while a relief aimed at encouraging certain environmental practices may seem the obvious solution, we wouldn’t be surprised if there was an element of stick introduced instead. In our view, given the tenor of the advice by the Land Commission, one likely outcome is that this is a matter that requires further research before any definitive proposals are put forward.

The three yearly returns regime (along with further returns on assignation on termination) was intended to reflect the true nature of Scottish leases – as flexible creatures of contract – after more than a decade of having them taxed under SDLT in accordance with the principles of English property law.

Unfortunately, it appears to be a massive headache for everyone. Taxpayers often do not monitor their filing obligations, advisors tend not to take responsibility for reminders, Revenue Scotland struggle to effectively monitor and enforce compliance, lease assignations can be over complex when the parties disagree about the necessary filing obligations, it has been difficult for tax payers to file their own returns (and therefore they incur additional advisors fees), and penalties for a single missed return where there is no additional tax to pay can reach £1,600.

We fully expect some movement here. Options we know have been considered include:

• Making the returns less frequent (maybe 5 years – though this could be worse for compliance).
• A simplified check-box system for nil-tax returns.
• Only applying the further returns regime to leases which meet certain thresholds or have specific hallmarks (such as high value leases which are within the 2% tax band, or leases with a substantial amount of variable rent).
• Going back to the “bad old” ways and realigning the LBTT leases rules with SDLT (or similar).

This has been an ongoing discussion between various professional bodies and the Scottish Government since LBTT was introduced. Unlike SDLT which contains reliefs both the seeding of, and transfer of units in, certain kinds of investment vehicles (PAIFs, CoACS and RIFs), LBTT was originally enacted with none of these provisions. A 2018 consultation on introducing them was abandoned due to Covid-19. A 2023 consultation resulted in the introduction (from April this year) of a unit transfer exemption for CoACS units. (CoACS have no legal personality so the unit holders are treated as owning the property – the new legislation will deem them to be company shares, effectively blocking the tax). However, there is still no seeding relief for any of these structures, and no unit transfer exemption for RIFs (Reserved Investor Funds – a new and flexible form of investment vehicle).

In an age where local authority pension schemes (a major investor in property and infrastructure projects) are being encouraged to pool their investments, this matters because one of the key vehicles used for pooling are CoACs. We know from industry bodies that CoACs managers have historically avoided investing in Scottish property because of the LBTT issues.

We expect that the report may just reiterate the steps taken to date, and note that they are still looking at seeding reliefs and RIFs. We aren’t hopeful for any specific advances to be taken.

Under the LBTT Act, the Scottish Ministers have the power to introduce regulations which charges LBTT on the transfer of company shares, where that company owns residential property. This power has not been used to date and, it’s important to note, a raft of tax measures have been introduced to tackle issues around “enveloped housing” – removing the majority of the benefits that used to be possible. These include: the Annual Tax on Enveloped Dwellings; extending non-resident IHT to UK residential property held in offshore companies; the introduction in 2015 of “ATED related gains” rules, and the full introduction on non-resident CGT in 2019 for the sale of “UK land rich” companies.

It’s tempting to conclude that the problem the RPHC power was intended to answer doesn’t exist to the same degree anymore, and any blanket power to tax transfers of RPHCs would need to be carefully drafted or it may have unintended consequences.

At present there is no exceptional circumstances relief from the ADS. Indeed the Scottish Government considered and rejected such a relief in the 2024 reforms to the ADS on the basis that the extension of various qualifying periods from 18 months to 3 years should solve the majority of potential issues.

In our view it has not. And we are deeply sceptical that a tightly constrained exceptional circumstances rule would do much to solve the myriad of ADS issues that still arise in practice. Nor would it help cut through the increasing complexity of the ADS legislation that conveyancers are expected to deal with, and the counter intuitive results that it throws up. The majority of Scottish tax cases that have been heard since the introduction of LBTT concern the ADS and, like a paterfamilias saying grace before every meal, it is now standard for the tribunal to qualify every decision by stating that they do not have the jurisdiction to consider fairness. The best answer to the problems with the ADS is – to be blunt – to tear it up and start again, not to fiddle around the edges.