The following rules are covered at LBTT(S)A 2013 Schedule 19, Paragraph 29.
Under Scots law, variations to a lease are not generally treated as creating a new lease. The 3-yearly review return will capture variations related to rent of a lease. However, there are three types of variations of a lease that are treated as acquisitions of a chargeable interest:
- where a lease is varied to reduce the amount of the rent, the variation is treated as the acquisition of a chargeable interest by the tenant;
- where any consideration is paid by the tenant in money or money’s worth (other than an increase in rent) for any variation of the lease (other than a variation in the amount of rent or the term of the lease), the variation is treated as the acquisition of a chargeable interest by the tenant;
- where a lease is varied to reduce the term, the variation is treated as the acquisition of a chargeable interest by the landlord.
The person acquires the chargeable interest where they benefit from the variation of the lease. If there is a payment of money or money’s worth in exchange for any of the above variations an LBTT return would be due if this exceeds the relevant threshold.
If the relevant party makes no payment for the variation or only agrees to give up a right under the lease contract exchange for the variation (which is not treated as money or money’s worth) then there will be no consideration chargeable under paragraph 29 (see LBTT2001).
Examples
Lyndsey grants a lease to Theresa on 1 December 2020 for a term of 45 years at a rent of £650,000 per annum. The NPV for the lease is £14,622,043. The LBTT payable on the rent is £270,940.
On 1 December 2021, Theresa pays Lyndsey £10,000,000 to reduce the rent for the remainder of the term to a nominal amount of £100 per annum.
An LBTT conveyance return showing the consideration of £10,000,000 and payment of tax would be required no later than 31 July 2021 as the payment by the tenant to the landlord to reduce the rent is liable to tax. The tax payable will be £488,500.
Where a lease is varied to reduce the rent, the variation is treated, under Paragraph 29(1), as an acquisition of a chargeable interest by the tenant. As the tenant already has a major interest (the lease), a land transaction return is only required if the variation is for chargeable consideration exceeding the relevant threshold.
The change in rent will be taken into account in the next 3-year review. The NPV is recalculated to £630,172 with LBTT of £4,801 due. As LBTT of £270,940 has already been paid, there is a repayment arising of £266,139.
Jason grants a lease to Penelope on 1 January 2021 for a term of 10 years at a rent of £100,000 per annum. The NPV of the lease is £831,661 and LBTT payable of £6,816.
Jason agrees to reduce the rent to £80,000 per year on 31 December 2021.
There is a variation to a lease under Paragraph 29(1) as the lease has been varied to reduce the amount of the rent and is treated as an acquisition of a chargeable interest by the tenant (Penelope).
However, Penelope has not given any chargeable consideration for the acquisition. There is therefore no LBTT due and the transaction is not notifiable.
The change in rent will be taken into account in the next 3-year review. The NPV is recalculated to £684,652 and LBTT is £5,346. As LBTT of £6,816 has already been paid, there is a repayment arising of £1,470.
Lily grants a lease to Tom on 25 September 2019 for a term of 25 years for £25,000 per annum. The NPV of the lease is £412,038. LBTT of £2,620 is due.
On 1 August 2021, Lily agrees that the term of the lease will be varied so that it expires on 31 December 2030 instead of on its original termination date (24 September 2044) and Lily agrees to pay Tom £200,000.
This is the acquisition of a major interest by Lily, the landlord, who should make an LBTT return no later than 30 August 2021 and pay the LBTT due of £500.
The reduced term will be taken into account in the next 3-year review. The NPV is recalculated to £241,583 with LBTT due of £915. As £2,620 has already been paid, a repayment of £1,705 arises.
Where a lease is varied so as to reduce the term, this is treated as the acquisition of a chargeable interest by the landlord, under Paragraph 29(3).
In this example, this is the acquisition of a major interest since the landlord is relinquishing part of their major interest (the lease). If the landlord gives chargeable consideration of £40,000 or more to the tenant, a return will be required, otherwise the transaction does not have to be notified.
Break and Irritancy clauses and Options to Renew
Under Schedule 19, Paragraph 19(a), break and irritancy clauses in a lease for a fixed term are ignored for LBTT purposes and do not reduce the term specified in the lease documentation.
If a break option is exercised, a termination return would be required which may lead to a repayment of LBTT. However, merely vacating the let premises before the term of the lease or deemed lease has expired (in the absence of a break) will not create entitlement to a repayment of LBTT.
Similarly, under Paragraph 19(b), options to renew or terminate a lease are ignored for LBTT purposes and the initial charge to LBTT is based on the contractual term stated in the lease documentation.
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