Land and Buildings Transaction Tax (LBTT) was introduced on April 1 2015 to replace Stamp Duty Land Tax in Scotland. It affects commercial leases in Scotland, which include agricultural tenancies.
Any agricultural lease granted on or after April 1 2015 will be subject to the LBTT regime, albeit it may not be immediately notifiable to Revenue Scotland. It is the tenant’s responsibility to make an LBTT return, if required.
A lease is notifiable in terms of the LBTT legislation where the grant is for more than seven years and where the lease is for less than seven years but an LBTT liability arises.
An LBTT liability arises where a tenant ‘buys’ the lease for more than £40,000; and/or where the rent is of a high enough level to bring it within the LBTT threshold for leases (£150,000).
Whilst there are few issues with fixed duration tenancies such as short limited duration tenancies and limited duration tenancies, secure tenancies governed by the Agricultural Holdings (Scotland) Act 1991 (1991 Act tenancies) pose some difficulties. It is common for a secure 1991 Act tenancy to be granted for a period of one year, and it will thereafter run on a year to year basis, automatically renewing by a process called tacit relocation.
If the rent is not high enough to create an LBTT liability, the lease is not notifiable to Revenue Scotland as the criteria specified noted above has been satisfied.
However, as the lease tacitly relocates, it is deemed to be a ‘growing lease’ and so as the initial period of one year expires, it will be deemed to have been the grant of a two-year lease from the original date of entry. At the expiry of the second year, it will be a three-year lease and so on. An LBTT calculation should be made each time the lease is extended to ensure that no LBTT payment arises.
When the lease becomes a seven-year lease (ie at the expiry of the sixth year), it becomes notifiable, whether nor not a tax liability arises and a return should be made by the tenant to Revenue Scotland within 30 days of the 6th anniversary, and then every three years thereafter as is required by the LBTT legislation.
On the assignation of a secure 1991 Act tenancy which falls under the LBTT regime and which was previously notified to Revenue Scotland, returns to Revenue Scotland are required.
The outgoing tenant is required to make a return to advise Revenue Scotland that he is no longer bound by the terms of the lease, and the incoming tenant should also make a return advising Revenue Scotland that he is now the tenant under the lease.
Both returns ought to be made within a specified time period to avoid penalties arising. The incoming tenant will then ‘step into the shoes’ of the outgoing tenant and become responsible for all future payments and liabilities.
This leaves a hazy cloud over how Revenue Scotland will treat the assignation of a secure 1991 Act tenancy which does not presently fall under the LBTT regime, and for which an assignation fee is being paid by the incoming tenant.
The incoming tenant is, ultimately, paying for an interest in land and so, therefore, a notification to Revenue Scotland is likely to be required if the assignation results in an LBTT liability.
However, the practice surrounding notification in these circumstances is still unclear and professionals are undoubtedly going to require guidance from Revenue Scotland on this matter.
This article was originally published 17 April 2017 in The Courier.
