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Scottish land and buildings transaction tax

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SDLT will cease to apply in Scotland on 15 April 2015 and will be replaced by the land and buildings transaction tax. The draft bill establishing the tax proposes a departure from SDLT in a number of areas. The tax will be progressive, not slab based, it will have a more narrowly focussed set of reliefs in order to prevent abuse (including the removal of sub-sale relief) and will use a combination of targeted and general anti-avoidance rules. The system will be better aligned with Scots property law. A new tax authority, Revenue Scotland, will manage the tax with collection delegated to the Registers of Scotland.

On 15 April 2015, under the Scotland Act 2012, SDLT (as well as landfill tax which is outwith the scope of this article) will ‘switch off’ in Scotland and a corresponding adjustment will be made to the block grant available to the Scottish government from Westminster. The Act gives the Scottish government power to design and manage their own replacement taxes (or not) and to retain the revenue raised. These devolved taxes should not be confused with the Referendum Bill which is an entirely separate matter.

The Scottish government could, in theory at least, take the view that SDLT should not be replaced in Scotland. However, the reduction in the block grant available to the Scottish government and the limited flexibility in tax raising powers which it was afforded by the Scotland Act 2012 restricts its ability to create a radically different approach to the system of property taxation in Scotland.

The Land and Buildings Transaction Tax (Scotland) Bill

The Land and Buildings Transaction Tax (Scotland) Bill was introduced on 29 November 2012. It was the first use of the Scottish government’s powers under the Scotland Act. There has been extensive consultation with stakeholders and there is a commitment to set a simpler, fairer tax which is more aligned to Scottish property law than SDLT and which is less open to abuse. This approach is broadly welcomed by those involved in the consultation, but there will inevitably be winners and losers where the system departs from the existing SDLT regime.

The Bill is currently subject to scrutiny of the Finance Committee of the Scottish government which is expected to report its findings at the end of March 2013.

What are the main themes?

The Bill borrows heavily from the current SDLT legislation in FA 2003. However, there are a number of notable departures:

A progressive tax: The current SDLT slab-based system has been criticised for creating a distorted market around the thresholds. The LBTT Bill proposes a progressive tax, with a nil rate band and at least two other band thresholds. Where consideration exceeds a threshold, the rate is increased only in respect of the excess. This ought to avoid the bunching of prices around the thresholds and it is hoped that it will discourage the use of avoidance mechanisms aimed at avoiding certain rates. The proposal has received broad support in consultation, however, concerns have been raised from those involved with commercial property that the progressive nature of the tax will inevitably lead to increased tax for those operating at the upper end of the spectrum. As a result, Scotland could become a less attractive location for property investment/development. This is something which the Scottish government will need to take into account when setting the rates, but it is difficult to see how an increased overall tax liability for those at the higher thresholds can be avoided.

Scope of LBTT: LBTT will apply to land transactions where the land or property is situated in Scotland. The definition of a land transaction is similar to that under SDLT and, like SDLT, there are certain exceptions. However, licences will not be excluded from the scope of the tax. There are a number of commercial situations where high value licences are commonplace. Those advising clients in these areas should take note of the future potential additional cost. In addition, it is fairly common for group companies to occupy properties under informal licence arrangements. Group relief should be available but would need to be claimed. There is a case to be made here for a targeted exception in relation to group situations.

Reliefs and exemptions: In order to reduce the scope for avoidance, and better tailor the system to Scottish requirements, the removal of some of the existing reliefs under SDLT is proposed. There are a number of withdrawals, however the most contentious is likely to be the withdrawal of sub-sale relief. This relief is perceived to be a ‘gateway for avoidance’ but its removal will cause disappointment for property developers operating in Scotland in an already tough market. Consultation in relation to SDLT sub-sale relief has resulted in draft legislation proposing a targeted relief where there is no tax avoidance motive. Whilst this approach presents its own difficulties, it does at least recognise that there is a commercial rationale for the existence of a sub-sale relief and it is hoped that the Scottish government can similarly be persuaded of this.

Anti-avoidance: SDLT has proven to be a tax ripe for avoidance activity ranging from fairly simple allocations of consideration to complex schemes involving offshore entities and trust arrangements. The Scottish government is keen to learn from the problems which have arisen under SDLT and is proposing that avoidance be dealt with by:

  • a move away from the slab tax system;
  • modification and/or removal of certain reliefs and exemptions;
  • clear guidance as to the policy intention of reliefs; and
  • inclusion of both targeted anti-avoidance rules (TAARs) and a general anti-avoidance rule (GAAR).

Notably, the much criticised SDLT TAAR contained in FA 2003 s 75A does not feature in the Bill. This was considered unnecessary given the proposal to include a GAAR but it has been noted that overly complex TAARs can be ineffective in preventing avoidance and the aim is to keep TAARs clear and simple.

The Scottish government is consulting on the general administration of devolved taxes and the ‘Scottish GAAR’ will form a part of that debate. This will inevitably be informed by the approach that the UK government is taking in relation to the GAAR. The Scottish government does not wish to automatically default to the UK proposals; however any significant departure could result in Scotland becoming less attractive as a location for investment if two radically different GAARs have to be considered in the context of one transaction which may have LBTT as well as non-devolved tax implications.

Corporate wrappers: In general, the treatment of corporates follows the approach under SDLT, including the availability of group relief. However, the Bill indicates an intention to bring forward detailed proposals in relation to a tax on the transfer of interests in corporates which hold or deal with residential property. It is surprising that the Scottish government should seek to focus on these avoidance arrangements, as it is not evident that corporate wrappers are in common use in Scotland for SDLT avoidance purposes in residential property transactions. However, it is hoped that any provisions which are adopted will be framed in such a way as not to unnecessarily prejudice property development vehicles which are not established for tax avoidance purposes.

Partnerships, trusts and commercial leases: Two areas where Scots law departs significantly from English law and where the SDLT regime is widely held to be overly complex are partnerships and trusts. For the moment, the SDLT provisions have been replicated in the Bill. The intention, however, is to consult with stakeholders and draft simpler, clearer legislation which is more appropriate to Scots law.

In addition, the treatment of commercial leases and the transitional arrangements relating to leases that were within the SDLT regime when entered into are similarly under consultation and details are yet to be provided. It is good to see the Scottish government learning from the difficulties which were encountered in relation to the transitional arrangements which were adopted when SDLT was introduced.

Revenue Scotland and collection of LBTT: Both LBTT and landfill tax will be administered by a new taxing authority, Revenue Scotland. A bill on the administration and management of devolved taxes is subject to consultation. It is clear that the Scottish government wishes to adopt legislative machinery that will create a foundation for the administration and management of a wider range of devolved taxes than the two events-based taxes which are to be devolved under the Scotland Act 2012. This approach is commendable in principle, but there is a limited amount of time in which to debate and legislate for a sound management structure which will work for LBTT and Landfill Tax and will be effective by 2015. Grappling with what are, at present, hypothetical issues relating to taxes that may be devolved in future could prove to be a distraction from the job in hand.

Revenue Scotland will not deal with the day to day collection of LBTT. This will be delegated to the Registers of Scotland, which will collect the tax when dealing with registration of title to property or land. Taxpayers will be required to pay LBTT within 30 calendar days of the effective date of the transaction. Land and property will not be able to be registered in the Land Register or Books of Council and Session until arrangements ‘satisfactory to the tax authority’ have been made for payment of LBTT.

Watch this space

Much of the new regime is yet to be bottomed out (not least the rates of tax which are likely to apply) and until this happens it is not clear what the overall impact will be on the Scottish real estate market. LBTT provides an opportunity for the Scottish government to create a system which is more ‘fit for purpose’ in Scotland than SDLT, provided it can be done in a way which doesn’t result in Scotland becoming a less attractive place to do business. Those advising on transactions which have a Scottish real estate element should keep a close eye on developments and ensure that their clients are aware of the change in regime, particularly where it could apply to completion of contractual arrangements which are entered into now.

Karen Davidson is a legal director at Pinsent Masons