Land and Buildings Transaction Tax (LBTT) was introduced in Scotland on 1 April 2015 for transactions involving residential and commercial land and buildings in Scotland. On 1 April 2018, additional reporting requirements came into force for tenants occupying under non-residential leases, including agricultural leases.
At present, the tenant must submit the initial LBTT return to Revenue Scotland within 30 days of the ‘Effective Date’ of the lease. From 1 April 2018 tenants are also required to identify tax changes where applicable and to submit further LBTT returns as follows:
- On every third anniversary of the Effective Date;
- On any assignation of the lease to a new tenant; and
- On termination or renunciation of the lease (whether that Lease is terminated early or at its natural expiry).
The rationale behind these additional returns is to allow the LBTT payable on the lease to be recalculated in the event that there has been a material change in the lease terms during the lease period.
The requirement to make these returns imposes an additional administrative (and possibly financial) burden on tenants: they are required not only to make the return but also to recalculate the tax due using the applicable tax rates at the Effective Date of the Lease. If more tax is due, they have to pay it at that stage and if less is payable, they can make a claim for repayment of tax in the LBTT return.
The Effective Date
The Effective Date of a lease is generally the earliest of:
- The date of entry;
- The date the first rental payment is made; or
- The last date of signing of the lease.
- Revenue Scotland guidance is available on this point on its website https://www.revenue.scot
Where the interest of the Tenant is transferred to another party, the lease has been assigned and a return is required from the outgoing Tenant. The new tenant may also be required to complete a return if they have made any payment to acquire the lease. As we have seen above, the new tenant or assignee will also be required to make a further return on every third anniversary of the Effective Date of the lease.
What type of Leases require a Return to be made?
Additional LBTT returns are required for leases of all non-residential property entered into on or after 1 April 2015 and notifiable for LBTT purposes at that time. Broadly speaking, all non-residential leases are notifiable to Revenue Scotland unless:
- they are for a term of seven years or less and there is no LBTT payable, or
- they are for a term of more than seven years but any premium is less than £40,000 and the yearly rent is less than £1,000.
Leases originally entered into prior to 1 April 2015 may also be affected if they have been varied after that date to extend their term.
When should the Return be submitted?
In the case of the three yearly returns, the tenant must submit a return to Revenue Scotland within 30 days of every third anniversary of the Effective Date and then every three years throughout the term of the lease.
In the case of assignation or termination of the lease, returns must be submitted within 30 days of the date of assignation or termination.
Revenue Scotland has information on its website. This provides information about how to complete and submit returns, incudes full guidance on how to complete returns accurately and there is also a tax calculator. Returns can be submitted by tenants online or by post.
A tenant who fails to submit an LBTT return will be liable to pay penalties and also interest on the unpaid tax.
In conclusion, if you are a tenant under a lease that is notifiable for LBTT purposes take a note of the Effective Date and each three yearly anniversary and advise your Accountant if you have one, as an extra check. You must remember to submit all Returns and additional LBTT timeously.
How can Morton Fraser help?
Some agricultural leases can be complex and it is important that tenants and landowners are fully aware of what is required of them. For more information, please contact the Agricultural and Rural Property Team here at Morton Fraser.