Land and Buildings Transaction Tax: Key Considerations for Commercial Tenants

Land and Buildings Transaction Tax (“LBTT”) is a tax affecting property transactions, which will generally apply to commercial tenants at the commencement of a lease. Tenants should also be aware that there are further filing requirements which arise throughout the lease term.

LBTT calculation

LBTT is charged on the net present value payable by tenants, which is comprised of the rent paid in terms of the lease, together with any additional premium payments. If VAT is payable on the rent, the figures noted on the calculation should account for this and reflect that VAT is charged.

A tax calculator can be found on the Revenue Scotland website.
The current rates of LBTT for rents at present are as follows:

Return requirements

Initial return

The majority of commercial leases in Scotland will be notifiable, meaning that an LBTT return must be submitted to Revenue Scotland within 30 days of the effective date of the transaction. It may be that no actual tax is payable, but that does not extinguish the tenant’s requirement to submit a return within the timescales specified.

Commercial leases in Scotland are notifiable except (1) where the term of the lease is less than seven years and there in no LBTT payable; and (2) where the term of the lease exceeds seven years but any premium does not exceed £40,000 and the annual rent does not exceed £1,000 per annum.

Three-year returns

A tenant’s filing requirements do not end when the initial return is submitted. Instead, Revenue Scotland require tenants to submit further returns on every three-year anniversary of the effective date. This allows Revenue Scotland to monitor any variations to the lease (such as an increase to the term or rent reviews) which may affect the tax position.

Tenants should note that, even if there have been no variations to the lease, a nil return must still be submitted within 30 days of the triennial anniversary of the effective date. If tenants fail to submit returns timeously, penalties may be levied by Revenue Scotland.

Lease variations

The filling requirements for lease variations vary.  For example, if the lease was entered into before 1 April 2015 and has not been varied since then, it is likely that the variation will be treated as a new lease for LBTT purposes, with the tenant being required to submit a return on that basis. Alternatively, if a lease which has already been notified is varied, then there may not be a requirement for an immediate submission at the variation stage; instead, notification of the variation terms to Revenue Scotland may occur when the next three yearly return falls due.

Assignations

Where a notified lease is assigned, it is the responsibility of the outgoing tenant to submit an LBTT return accounting for any changes up to the date of the assignation. The assignation return must be submitted within 30 days of the assignation date. The incoming tenant will then inherit the position of the outgoing tenant and will be responsible for future submissions. If the lease which is being assigned hasn’t been notified, the outgoing tenant does not need to submit a return and the incoming tenant must assess the LBTT position and deal accordingly.

Termination

Termination returns are also required when a lease comes to an end. There are several ways a lease may be terminated (renunciation, the exercising of a break option, irritancy or the natural expiry of the term) and a termination return is required irrespective of the circumstances. With early surrenders (such as agreed renunciations or break options being exercised), tenants may be due a tax rebate if, for example, the initial return assumed that the term of the lease was to be 10 years and it was in fact terminated after five.

Summary

Commercial tenants should note these filing requirements and keep them in mind, not only at lease commencement but also throughout the term of the lease. It is crucial that tenants discuss LBTT considerations with their solicitor at the outset of a transaction so that they have clarity on their responsibilities in relation to LBTT and any tax payable, allowing them to budget accordingly.

Rory is part of Anderson Strathern’s dedicated LBTT Enquiry Group and would be pleased to assist with any queries relating to LBTT and commercial leasing.

You may also be interested in the following articles:

• Ownership by Possession: A Brief Summary on Prescriptive Claims | Anderson Strathern
• BRP cards, eVisas and Right to Work checks: eVisa creation open to all BRP holders from 6 August 2024 | Anderson Strathern
• Information for employers on recent UK unrest | Anderson Strathern
• Securing the future: succession planning for business owners | Anderson Strathern

Legal disclaimer