This article reviews the Scottish Government’s proposal to replace Stamp Duty Land Tax with a new Land and Buildings Transaction Tax.
I. Introduction
Hard on the heels of enactment of the Scotland Act 2012, the Scottish Government has published the first consultation paper dealing with aspects of the Act. Entitled "Taking forward a Scottish Land and Buildings Transaction Tax", the consultation seeks views on proposals for replacing Stamp Duty Land Tax (SDLT) – a tax on property transactions in the UK – with a new Land and Buildings Transaction Tax. The tax will apply to circumstances where property is purchased or leased, and other rights, such as taking an option over land, will also fall within its ambit.
II. New tax powers
From 2015, the Scottish Parliament will have new powers over specific taxes relating to property transactions and landfill. Existing taxes – SDLT and Landfill Tax – will be abolished and replaced in Scotland by something else. A further consultation is expected later this year on the alternatives to Landfill Tax. A third consultation will look at tax management and collection arrangements for Scottish taxes. This current consultation presents options for an alternative way of taxing land and property transactions in Scotland. Following the consultation, a Bill will be introduced in Autumn 2012.
SDLT and Landfill Tax are, at present, the only two taxes that are to be devolved to the Scottish Government. Although the Scottish Parliament will also, in due course, be able to set a Scottish rate of income tax, under provisions of the Act, the structure and administration of that tax will remain with the UK Government.
III. New land tax proposals
The current tax that is levied on land and building transactions – Stamp Duty Land Tax – was introduced in December 2003 and replaced the old stamp duty regime. SDLT has not been without its critics, and has become increasingly complex over the years. The new Scottish tax – Land and Buildings Transaction Tax – will bring with it a new acronym – LBTT.
Property transactions will continue to be taxed in the future, and the tax will, as at present, apply to residential and commercial properties.
One of the key potential differences is the way in which the tax is applied in the future. SDLT is currently charged on the "slab" basis – in other words, once the threshold for charging the tax at a particular rate is reached, tax is charged at that rate on the whole price, not just on the amount of the price over the threshold amount (as happens with income tax, for example). The consultation appears to favour a more progressive approach to charging, but the Scottish Government is at pains to state that it does not plan to give any indication of thresholds or rates of tax at this stage, but will leave these to be determined at the time of introduction of the tax, when it will be possible to take account of the prevailing economic circumstances.
IV. New tax collection agency
As well as setting new taxes, the Scottish Government proposes that the devolved taxes will be administered by a new organisation to be established, to be known as Revenue Scotland. It is also proposed that as far as possible the new taxes will be submitted and paid electronically. A greater use of online systems, including online registration of title to land, will be encouraged, so that submission of an LBTT return, payment of the tax due, and registration of title would all happen simultaneously. Currently this is only possible under the system of Automated Registration of Title to Land (ARTL) which is only available in a limited range of property transactions, predominantly residential remortgages. Significant developments in these online systems would be required for a meaningful proportion of Scottish property transactions to be able to be completed in this way.
It would still be possible (as at present) for the taxpayer to have up to 30 days from the effective date of completion of the transaction in question within which to pay the tax. However, the consultation document proposes that it would not be possible, as it is at the moment under SDLT, to register the title to the property until the tax is paid. From a practical point of view then, since to ensure that its title is perfected as soon as possible after completion, a purchaser's title must be submitted for registration immediately upon completion, this is likely to mean that payment of LBTT will have to be made upon completion or settlement of the transaction. However, many lease transactions, where the term of the lease is less than 20 years, and therefore not registrable in the Land Register or Register of Sasines, will be able to benefit from this period of grace. The tax would however still have to be paid before registration for preservation or execution in the Books of Council and Session, which is a common procedure for leases of all lengths.
V. A progressive approach
The Scottish Government appears to favour a move to a progressive tax regime for property. This would mean that instead of applying the "slab" rate to the whole of the price of a property, only the amount of the price over the relevant threshold would attract tax. In this way, buyers at the lower end of the market in lower price ranges would not be disproportionately disadvantaged if the price they offer strays just over a taxable threshold. Instead they would only be paying the relevant rate of tax on the proportion of the price that exceeded the threshold. In this way the proposals are intended to be fairer, although it may mean in some circumstances that more tax would be payable than at present, such as where the price is just below the threshold for a higher rate. Overall however, the effect would be that the amount of tax payable would rise more proportionately, according to the amount of the price, rent or premium paid.
The consultation makes it clear however, that, as is presently the case with SDLT, the new tax would have a lower top rate for commercial property, compared with that for residential property (4 per cent and 7 per cent under current SDLT arrangements), specifically to ensure that there is no significant negative effect on investors and businesses purchasing or leasing in Scotland as opposed to elsewhere in the UK.
VI. Exemptions and reliefs
SDLT arrangements include a number of reliefs and exemptions and the view of the Scottish Government is that the new tax would be likely to maintain the majority of these, but in a simplified system. For example, a price of under £40,000 would continue to be exempt, meaning not only that no tax would be paid (£40,000 is well below the minimum threshold in any case), but also that there would be no requirement to make any return to the tax collection agency.Likewise, it is intended that the reliefs that would be available for LBTT, would be broadly similar to those available under SDLT, but having regard to whether or not they are used in, or appropriate to, Scotland. Group relief, sale and leaseback relief and charities relief, among others, would continue to apply, while shared ownership relief and collective enfranchisement by leaseholders relief would not.
VII. No hiding place
Anti-avoidance measures that currently apply to SDLT will also be applied to LBTT in the future. This includes the proposed "corporate residential" rate of 15 per cent prospectively imposed on residential purchases of over £2 million where a home is purchased by a company, partnership or collective investment scheme.
In addition, the Scottish Government is considering imposing a general anti-avoidance rule, to make sure that arrangements that are designed specifically with a view to avoiding payment of tax are foiled. Further consultation on this proposal will take place later in the year although views are sought during the current process.
VIII. Leases
How LBTT will apply to commercial leasehold transactions is up for grabs. The Scottish Government recognises that current arrangements under SDLT on leases do not always fit well with Scottish lease law and practice. The consultation paper therefore makes no recommendations and instead asks that respondents make suggestions for how better to align law and practice to the new tax regime.
Residential leases of 20 years or less (which due to legislative restrictions on the length of residential leases, means the vast majority of residential leases) will be exempt from LBTT.
IX. A cautious welcome?
Initial reaction from tax experts is cautiously positive. As ever, the detail of the tax and its administration and management will be crucial to its success, particularly in ensuring that Scottish businesses are not adversely affected. Tailoring the tax more closely to Scottish law and practices, particularly in relation to leases, partnerships and trusts should ensure that the tax is more relevant and appropriate in these cases.
Interested parties have until August 30, 2012 to respond to the consultation.