Leases often continue over a number of years and can be subject to change through, for example, variations, extensions, assignations, rent reviews and tacit relocation. Under LBTT the tax position must be reviewed to give effect to these changes.
The LBTT legislation does not require a further LBTT return every time a change to the lease takes place. Instead, a further LBTT return must be submitted by the tenant at every third anniversary of the effective date of the lease and any additional LBTT paid or overpaid LBTT reclaimed.
This is different from the position under Stamp Duty Land Tax (SDLT).
The three-year LBTT review returns inform Revenue Scotland of any changes that have occurred since the effective date or the last review date. They review the amount of tax chargeable on the lease and take account of any changes. The new Net Present Value will be calculated automatically when the 3-year review return is completed.
Note: A review return must be submitted even if there have been no changes to the lease or if no additional tax is payable.
If a lease terminates or is assigned on the same day that a 3-yearly review return is required (the relevant date), you only need to file a termination or assignation return. You do not need to also submit a 3-yearly review return as a return would already have been submitted, informing Revenue Scotland of any relevant changes that have taken place since the last return was submitted.
This requirement also applies to variations/extensions to leases treated as new LBTT leases under the Land and Buildings Transaction Tax (Transitional Provisions)(Scotland) Order 2014, as these are notifiable transactions under Section 29, LBTT(S)A. For more information see the transitional guidance.
These provisions do not apply to:
- leases which have never been subject to LBTT (i.e. leases which were and continue to be subject to SDLT or Stamp Duty); or
- leases which have been subject to LBTT but exempted from charge by virtue of full relief being claimed on the first LBTT return or an amendment to it.
The type of variations that may be agreed between the landlord and tenant, other than assignations or terminations, include:
- Increasing or reducing the term of the lease
- Increasing or reducing the rent
- Increasing or reducing the property area
Any changes to the rent or the term of the lease that take place after the effective date of the lease should be included in the next 3-year review. The return must include a calculation of the tax payable in that 3-year period based on the tax rates and bands that were in force at the effective date of the lease.
If there is any consideration, other than rent, paid by the tenant or landlord for the variation to the lease this may be treated as a chargeable interest - LBTT6012
The Lease review date
3-year reviews takes place every third anniversary of the effective date of the original LBTT notifiable lease (see LBTT6002). This is called the review date. This is covered at LBTT(S)A 2013 Schedule 19, Paragraph 10.
There are other circumstances where the review date will differ. In these cases it will be every third anniversary of the event that triggered the first LBTT return as a result of:
- a contingency ceasing or consideration ascertained (under LBTT(S)A 2013 Section 31);
- the lease continuing beyond its fixed term (under LBTT(S)A 2013 Schedule 19, Paragraph 20);
- a lease with an indefinite term continuing after the end of a deemed fixed term (under LBTT(S)A 2013 Schedule 19, Paragraph 22; and
- an extension to the term or an increase in the rent that made the lease notifiable (under LBTT(S)A 2013 Schedule 19, Paragraph 30).
Note: The review date is the ‘relevant date’ for the purposes of the ‘relevant date’ field in the LBTT return. The effective date is the date the lease became notifiable.
Where the lease is assigned or terminated, the review date is the day on which the lease is assigned or terminated.
LBTT6008 – Assignation of a lease
LBTT6009 – Termination of a lease
Effect of Granting Securities over the Lease or Tenant Insolvency
If the lease is for a term of over 20 years and has a capital value it is possible that the tenant may grant a standard security over its interest to a third party creditor, such as a bank. A company or an LLP might also grant a floating charge to a third party which, on crystallisation (the point at which a floating charge converts into a fixed charge) may include the tenant’s interest in the lease.
The grant of a standard security or a floating charge does not affect the continuing obligation for the tenant to make three-yearly review returns (or assignation or termination returns). Indeed, neither the calling-up of a standard security nor the crystallisation of a floating charge affect the tenant’s obligation either, as there is no assignation to the creditor and the tenant remains vest in the lease. This remains the case even if the creditor under a called-up standard security “enters into possession”, because that phrase has a particular meaning in the context of enforcing a standard security (for example, it entitles the creditor to uplift rents) and does not entail the creditor taking physical occupation of the property: again, there is no assignation of the tenant’s interest in the lease.
Moreover, the tenant remains liable to make three-yearly review returns (and assignation and termination returns) even if (where it is a company or an LLP) it has a liquidator or administrator appointed, because again the tenant remains vest in its interest in the lease. However, under Section 44 LBTT(S)A 2013 the liquidator or administrator becomes the “proper officer” of the company or LLP and thus becomes the person personally responsible for ensuring that the returns are made.
Payment of tax and making a return
The tenant must make an LBTT return and their LBTT payment to Revenue Scotland within 30 days beginning with the day after the review date (see LBTT6016). This is known as the ‘filing date’. Part 4, Schedule 19 covers the review of tax chargeable.
Note: An LBTT review return must be submitted irrespective of whether there have been changes to the lease or if no additional tax is payable.
Information about submitting a lease review return as well as guidance on how to complete the return and pay tax are available separately on the Revenue Scotland website.
Note: The review date is the ‘relevant date’ for the purposes of the ‘relevant date’ field in the LBTT review return. The ‘effective date’ for a review return is the effective date of the original lease, this does not change.
The LBTT return must include an assessment of the amount of tax chargeable at the review date. This amount is calculated by using the rates and bands in force at the effective date of the original lease. If there have been changes to the rates and bands since the effective date of the lease, then these changes are not taken in to account.
Guidance relating to the effective date can be found at LBTT6002.
Examples
A production company enters a 5-year lease of a factory for a rent of £50,000 per annum. The effective date of the transaction was 01 December 2015. The Net Present Value (NPV) is calculated using the £50,000 payable in each of the 5 years.
The NPV is £225,752.62. The agent for the tenant submitted a LBTT return and a tax liability of £757 was paid based on the NPV.
The date of the first three-year review will be 1 December 2018, the third anniversary of the effective date of the lease. A review return must be submitted no later than 31 December 2018.
The effective date for the purposes of the review return will be the same as the original lease transaction. The relevant date will be 1 December 2018.
The amount of rent paid in the first three years was at the agreed rate of £50,000 per annum and the projected annual rent payable for the remainder of the lease is also unchanged at £50,000. The NPV remains at £225,752.62 and no further tax is payable.
Even though there have been no changes to the lease and no additional tax is payable, an LBTT return must still be submitted.
The next three-year review is due on 1 December 2021. The tax rates in force at the effective date of 1 December 2015 will continue to apply throughout the term of the lease.
Additional tax due
If more tax is payable at the review date (for example, where the rent has been increased or where the actual rents are more than previously estimated), payment of the additional tax due must be made at the same time as the LBTT review return is made.
Examples
A renewable energy company enters a 10-year lease of a wind farm with a turnover-based rent estimated at £100,000 per annum. The effective date of the transaction was 1 May 2015. The Net Present Value (NPV) is calculated using the £100,000 payable in each of the 10 years.
The NPV was calculated to be £831,660.53. The agent for the tenant submitted a LBTT return and paid the tax liability of £6,816.
The date of the first three-year review will be 1 May 2018, the third anniversary of the effective date of the lease. A review return must be submitted no later than 31 May 2018.
The tenant must recalculate the NPV using the actual rent payable for the first three years along with the projected rent for the remaining term. The effective date for the purposes of the review return will be the same as for the original lease transaction. The relevant date will be 1 May 2018.
The actual rent paid in each of the first three years was £120,000 per annum. The estimated rent for the remaining term of the lease is £120,000 per annum. The NPV using this amount is £997,992.64. Applying the tax rates in force at the effective date of 1 May 2015 gives a tax liability of £8,479.
£6,816 was paid in relation to the original LBTT return, therefore a further £1,663 of tax must be paid at the same time as the review return is made.
The next three-year review is due on 1 May 2021. The tax rates in force at 1 May 2015 will apply throughout the term of the lease.
Less tax due
If less tax is payable at the review date (for example, because the rent has reduced or the area subject to the lease has been reduced, with a corresponding reduction in rent), then a claim for repayment of tax should be submitted in the LBTT review return.
SK Design Limited enters a 20-year turnover-based rent lease. The effective date of the lease transaction was 31 August 2015 and the turnover-based rent was estimated to be £250,000 per annum. The Net Present Value (NPV) is calculated using the estimate of £250,000 payable in each of the 20 years.
The NPV was calculated to be £3,553,100.83. The agent for SK Design Limited submitted a LBTT return and paid the tax liability of £34,031.
The date of the first three-year review will be 31 August 2018, the third anniversary of the effective date of the lease. A review return must be submitted no later than 30 September 2018.
SK Design Limited must recalculate the NPV using the actual rent payable for the first three years along with the projected rent for the remaining term. The effective date for the purposes of the review return will be the same as for the original lease transaction. The relevant date will be 31 August 2018.
The actual amount of rent paid in each of the first three years was £170,000, £210,000 and £195,000 respectively. It is estimated that the rent payable in future years will be £200,000 per annum. The recalculated NPV is £2,818,320.55. Applying the tax rates that were in force at 31 August 2015 the tax liability is £26,683.
£34,031 was paid on the original transaction, therefore a repayment claim of £7,348 can be made on the three-year review return.
The next three-year review will be due on 31 August 2021. The tax rates in force at the effective date of 31 August 2015 will continue to apply throughout the duration of the lease.
Examples
The effective date of a 10-year lease of a factory let for a rent of £500,000 per annum was 1 August 2015. The net present value (NPV) is calculated using the £500,000 payable in each of the 10 years.
An LBTT return was submitted and tax of £40,083 paid.
The tenant submits three-year review returns in 2018, 2021 and 2024. In January 2025, before the lease is due to come to an end, the parties agree to extend the term for a further five years at the same amount of rent.
No LBTT return is required at the time of variation. Instead it should be reported on the next three year review return.
The date of this three-year review will be 1 August 2027, the next three year anniversary of the effective date of the lease. This return must be submitted no later than 31 August 2027.
The NPV will be recalculated on the basis that the lease is now for a term of 15 years, with the actual rent paid in the first 12 years of the lease with the projected rent for the remaining term.
The recalculated NPV gives rise to tax of £56,087.
£40,083 was paid in relation to the earlier LBTT returns, therefore a further £16,004 tax is due as a result of the lease extension. This must be paid at the same time as the review return is made on or before 31 August 2027.
A flower shop was let to Tenant A for 15 years with an effective date of 5 August 2015. The annual rent paid by Tenant A was £45,000. Tenant A submitted a LBTT lease return and paid the tax liability of £3,682 within 30 days from the effective date.
The first 3-year review was due on 5 August 2018. A second 3-year review was due on 5 August 2021.
On 5 August 2022, the landlord increased the annual rent to £70,000. Tenant A does not need to take any action until the next 3-year review return is due. Tenant A must submit their next 3-year review return on 5 August 2024 and include the details of the variation to the annual rent.
The net present value (NPV) will be recalculated at this date. As the annual rent was increased in 2022, the recalculated NPV shows an additional LBTT of £1,548 is due, when applying the tax rates in force at the effective date of 5 August 2015.
Tenant A must submit a 3-year review return and a payment of £1,548 no later than 4 September 2024.
A flower shop was let to Tenant B for 15 years with an effective date of 5 August 2015. The annual rent agreed was £45,000. Tenant B submitted a LBTT lease return and paid their tax liability of £3,682 within 30 days from the effective date.
Tenant B submitted their 3-year review returns in 2018 and 2021. On 5 August 2022, the landlord agreed to reduce the term to 10 years. Tenant B does not need to take any action until the next 3-year review return is due. Tenant B must submit their next 3-year review return in 2024 and include the details of the variation to the term.
As the Landlord and Tenant B agreed to reduce the term to 10 years, the recalculated NPV shows that a repayment of LBTT of £1,440 can be claimed, when applying the tax rates in force at the effective date of 5 August 2015.
Tenant B must submit a 3-year review return no later than 4 September 2024. When claiming for a repayment, the new NPV will be calculated automatically when the lease details are entered in the return.
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