Tue 02 Jun 2015

LBTT or SDLT: Transitional arrangements in practice

Now that we're well into Land and Buildings Transaction Tax (LBTT) territory (it having been in operation since 1 April 2015), I thought that it would be worth mentioning a few of the transitional rules. These are the rules that govern when a deal is still subject to Stamp Duty Land Tax (SDLT) and when it is within the LBTT regime (albeit related to a previous SDLT deal).

Much has been written about LBTT generally, but there has been less focus on transitional arrangements. These will remain relevant for some time yet, particularly those that apply to commercial leases.

Pre-1 May 2012 contracts

The basic transitional rule is that SDLT will still apply to a transaction that completes on or after 1 April 2015 if it implements a contract that was entered into on or before 1 May 2012. There won't be that many contracts which fall into this category but it could still be relevant e.g. to some long fuse development purchase contracts that have many preconditions, including planning and site assembly.

Even some of such 1 May 2012 or earlier contracts will be subject to LBTT, if:

  • since 1 May 2012 they have been varied or assigned; or
  • the transaction involves the exercise of an option or pre-emption right which was exercised after 1 May 2012.

The transitional rules which are applying much more frequently are those relative to commercial leases. I discuss three of them here.

Extending the duration of an SDLT lease

First, let's look at the rules governing the extension of the duration of an SDLT lease. (By SDLT lease here, I mean a lease whose effective date was before 1 April 2015.) Commercial leases are often varied to extend their duration.

The applicable transitional rule here is that if:

  • the variation extends the duration of an SDLT lease; and
  • that variation (had it taken place before 1 April 2015)  would have been treated, for SDLT purposes, as the grant of a new lease for the extra duration,

then the variation will be treated in the same way for LBTT purposes.

The variation of the SDLT lease is therefore treated as a new LBTT lease (a notional new lease), for the period of the extra duration, at whatever rent is payable for the additional term.

Adding extra premises to an SDLT lease

It's also common to have a landlord and tenant wanting to extend the premises that are let by an existing lease - perhaps to incorporate a neighbouring unit or to add store or car parking areas. Usually this will involve an increase in the rent.

If an SDLT lease is so varied, this is also treated as a new LBTT lease (again a notional new lease) of the extra premises for a period equal to the unexpired duration of the lease - with LBTT calculated on the basis of the extra rent.

New LBTT lease replaces existing SDLT lease

Finally, I thought it was worth highlighting the transitional rule dealing with overlap relief.

Sometimes a landlord and tenant in an existing lease want to extend the duration but, at the same time, wish to make fairly significant changes to the lease. This might be e.g. because the lease was one of the first leases granted in a multi-occupancy building, and it is now out of step with those that are now being granted. Perhaps the service charge regime is now totally different or the lease content is just not up to current institutional investment standard.

In such cases the parties might agree (usually in return for some incentive to the tenant) to have an entirely new lease starting immediately, rather than to have a variation of the existing lease. So there would be a new lease and a surrender (or renunciation) of the existing lease. The new lease would partly relate to the unexpired duration of the existing lease (ie the overlap period) and would partly cover an additional period.

A transitional rule relief applies to ensure that there isn't double taxation of the same rent. If the existing lease was an SDLT lease, then any rent payable under it for the overlap period is deducted from the rent under the new lease for the purposes of the LBTT calculation. (This same relief applies going forward if the existing lease is an LBTT lease.)

New LBTT leases going forward

In each of the above three situations, an actual or notional new LBTT lease is created. The tenants under such new leases then have to keep in mind the ongoing obligations to Revenue Scotland that apply to LBTT leases. More on that in a couple of weeks' time.

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