Scottish Land and Buildings Transaction Tax: changes from 25 January 2019

The Scottish government has approved plans to change Land and Buildings Transaction Tax (LBTT) rates and bands for non- residential transactions and to increase the rate of the Additional Dwelling Supplement (ADS).

The rate of the ADS will rise from 3% to 4% on purchases of second residential dwellings over £40,000 and will take effect from 25 January.

The tax authority responsible for the administration and collection of LBTT is Revenue Scotland.

This articles summarises the key changes and relevant dates.

What type of land transactions will be affected?

• Commercial property transactions (classed as non-residential by Revenue Scotland). This covers the acquisition of ownership of a non-residential property as well as lease transactions where there is chargeable consideration other than rent (typically a premium);
• Residential property transactions where the ADS applies. The most common scenario in which buyers are likely to pay the ADS will be where they are acquiring a buy-to-let property or holiday/second home. However, the ADS does also catch transactions where people decide to buy a new main residence before selling their existing main residence, or they find that their sale transaction does not complete (for whatever reason) but they go ahead with the onward purchase of the new main residence. In those circumstances the ADS is payable but can be reclaimed. However, unlike in England where the period to reclaim is three years, in Scotland it is only 18 months. The ADS also applies to every residential purchase where the buyer is a company.

What will change?

• The non-residential LBTT rates and bands
• Current position (up to and excluding 25 January 2019):

• New position (from and including 25 January 2019):

• Residential property transactions where the ADS applies
• From and including 25 January 2019 the ADS rate will increase from 3% to 4% of the purchase price of the property.
• As before, the ADS is calculated as a percentage of the whole purchase price of the property. Therefore, if an individual acquires a second home subject to the ADS, he will pay LBTT at the applicable rates on the purchase price plus 4% of the total purchase price.

Transition period

The following transitional provisions will apply:

• non-residential transactions
• broadly, the current tax rates and bands apply where the contract was entered into before 12 December 2018 and the effective date is on or after 25 January 2019;
• the new tax rates and bands will apply where the contract was entered into on or after 12 December 2018 and the effective date is on or after 25 January 2019;.
• residential property transactions where the ADS applies ;
• broadly, the current ADS rate of 3% applies where the contract was entered into before 12 December 2018 and the effective date is on or after 25 January 2019;
• the new ADS rate of 4% applies where the contract was entered into on or after 12 December 2018 and the effective date is on or after 25 January 2019.

Commentary

In the accompanying policy notes to the budget, where these plans were first announced, the Scottish government highlighted that non-residential LBTT rates and bands are still the most competitive in the UK for non-residential transactions notwithstanding the proposed changes to the rates and bands.

As you would expect, one of the key drivers for the rise in the ADS rate is to increase LBTT revenue for the Scottish government. That is part of a wider political picture. However, from a real estate perspective, we are aware of concerns that the increase may deter investment in the second home and buy-to-let markets. Time will tell.

For tax advice, please contact our tax specialist Dan Kennedy and for advice on residential purchases in Scotland, please contact Jill Andrew.