Tax and residential development in Scotland: LBTT, VAT & more

This is an overview of the taxes which may apply to residential developments in Scotland.

LBTT

Land and Buildings Transaction Tax (LBTT) replaced Stamp Duty Land Tax (SDLT) in Scotland on 1 April 2015. LBTT is payable by the purchaser on the price plus any VAT on the price by the buyer for the acquisition of residential development land. It is payable at different rates on different tranches of the price. The commercial rates apply to bare residential development land as follows:

Non-residential rates and bands for LBTT

Buyers of new homes will pay LBTT on the price at the residential rates below with different rates applying to different tranches of the price.

Residential rates and bands for LBTT

Additional Dwelling Supplement (ADS)

The ADS is an additional charge which is added to any LBTT when an additional residential property (dwelling) is bought in Scotland. It is usually payable when:

• a residential property is bought when the buyer already owns one or more residential properties anywhere in the world
• if there are two or more buyers and at least one of the buyers already owns one or more residential properties anywhere in the world and
• the buyers are not replacing or selling their ‘only or main’ residence
• the buyer is a “non-natural person” for example, a company or trust where that person does not have another residential property

Since 1 April 2024, a share in a jointly owned property is only counted if the value of the individual share is £40,000 or more.

Multiple dwellings relief

Multiple dwellings relief (MDR) is available on most transactions that involve the purchase of more than one dwelling in a single transaction or in a series of linked transactions in Scotland. The relief ensures the buyer does not pay LBTT at a higher rate than if bought separately and lower rate bands would have applied. MDR is no longer available to buyers of homes in England who must pay SDLT.

Where the ADS is applicable, MDR may be available. MDR may also be available on the purchase of 6 or more residential properties bought in a single transaction even though these are relieved from the ADS and are treated as being non-residential.

MDR cannot be claimed if group relief, reconstruction relief and acquisition relief or charities relief is available for the transaction or was available and has been withdrawn from it.

VAT

VAT operates in the same way across the UK. The acquisition of land for residential development will generally be exempt from VAT unless the seller has opted to tax the site (subject to certain exclusions).

If the rules are complied with and the conditions set by HMRC are met, new residential developments are zero-rated for VAT, meaning developers can reclaim VAT on qualifying costs like building materials and services. However, not all costs can be reclaimed. The rules are complex, and so advice must be sought to ensure that the correct amount of VAT is refunded.

When it comes to the sale of new homes, the first sale of the heritable (freehold) or long leasehold (at least 20 years in respect of a Scottish lease) of a property which is a new dwelling meeting the required criteria will be zero-rated for VAT purposes. Broadly speaking, the criterial for qualifying as a new dwelling require that:

• it consists of self-contained living accommodation with no direct internal access to any other dwelling;
• the separate use or disposal of the dwelling is not prohibited; and
• planning consent must have been granted for the dwelling and construction carried out in accordance with that consent.

Zero-rating means that the developer will not be required to account for VAT (output tax) in respect of the supply of the new homes but will still be able to recover the VAT (input tax) on qualifying costs that it has incurred and which is attributable to the supply. Zero-rating can depend on whether or not particular works of construction amount to the construction of a new building or the conversion or alteration of an existing building.

Residential Property Developer Tax

The Residential Property Developer Tax (RPDT) has applied since 1 April 2022 throughout the UK. It was introduced to help fund the package of measures designed to bring an end to unsafe cladding and unusually for a UK tax, is intended to be time limited for a period of 10 years. The RPDT is payable by companies involved in residential property development activities in the UK.

RPDT only applies where profits from residential property development activities exceed £25m per annum; for groups of companies this applies on a group wide basis. No RPDT is payable on the first £25m of profits. RPDT does not apply to chargeable gains from land that is not disposed of by way of trade nor to gains on shares.

The UK Government advice sets out four key concepts that need to be considered when determining whether a company is an RP developer and falls within the scope of RPDT:

• Is the company liable to UK Corporation Tax (CT)?
• Is it carrying out activities of, or in connection with, the development of residential property in the UK as part of, or in support of, a trade carried on by the company or a member of its group?
• Does the company, or a member of its group, have an interest in the land that is being developed, either directly or through holding a substantial interest in a relevant joint venture company, which will later be disposed of in the course of that trade, other than an excluded interest?
• Does the development activity relate to residential property, in whole or in part, other than properties which are specifically excluded?

The tax base for RPDT is the company’s CT trading profit or loss for an accounting period under deduction of profits, income, losses and other deductions or allowances that do not relate to the residential property development trade and finance income or costs.

The rate of RPDT is 4% and is charged as if it were an amount of CT and all the usual rules and procedures applying generally to CT apply where relevant to RPDT.

Scottish Building Safety Levy

The UK and Scottish Governments have passed legislation which will introduce a building safety levy on the construction and renovation of new residential property. The levy which will apply in Scotland is similar but different to that which will apply in England.

In Scotland, the funds raised by the levy will be used to help fund the Scottish Government’s Cladding Remediation Programme. The levy will apply to newly constructed buildings intended for accommodation at the time of completion or conversion of an existing building to a dwelling including:

• new homes built by developers for onward sale
• new purpose-built accommodation (including student flats and build-to-rent properties)
• redevelopment of existing buildings to provide residential accommodation.

There will be exceptions including hotels, residential institutions and hospitals and there are exemptions for social and affordable housing delivered through government or local authority funding.

The levy will become payable in Scotland from 1 April 2028 by the owner of the property at the point the completion certificate or certificate of temporary occupation is issued. There are no transitional provisions to cover developments which were ongoing when the Building Safety Levy (Scotland) Bill was passed or those which begin before the levy becomes due.

The amount payable will be calculated using floor space but the rate at which the levy will be charged could differ geographically. The Scottish Government has undertaken to issue indicative rates in June. Early estimates predict around £2,900 per unit.

There is a levy free allowance of 29 units which can be carried over if not used within the tax year. A late addition to the Bill gives the Scottish Ministers the power to introduce a relief or partial relief for residential units sold to first-time buyers. The Bill also allows for at least 50% relief from the levy for brownfield development.

Conclusion

The above is a whistle stop tour of the taxes which may apply to residential development in Scotland. Advice should be taken in connection with any specific projects and transactions involving any type of property in Scotland.