LBTT6001 - Introduction to leases

LBTT6001 - Introduction to leases

A non-residential lease that is granted, or is treated as having been granted, for the first time on or after 1 April 2015 is potentially chargeable to Land and Building Transactions Tax (LBTT).The legislative provisions relating to leases can be found in Part 6 and Schedule 19 to the LBTT(S)A 2013. This guidance will cover lease transactions falling within Schedule 19.

The application of LBTT to leases reflects the principle that the transfer of an effective economic interest via a leasing arrangement or a conventional sale should be taxed in a similar way. In other words, the tax position should not distort commercial choices as to whether to lease or purchase property.

The method of calculating the tax due for leases under LBTT works in much the same way as it did under SDLT– with the tax chargeable for the lease transaction being the sum of any tax chargeable on the chargeable consideration which consists of rent plus any tax chargeable on the chargeable consideration other than rent. The net present value (NPV) of the rent payable over the term of the lease is used to calculate the tax chargeable in respect of rent. For LBTT the NPV is calculated (using the estimated future rent if the actual rent payable is not yet known, for example because of future rent reviews). At every three-year review of the lease, the NPV amount will be recalculated using the actual amount of rent paid during that period. The same calculation applies where the lease is assigned or is terminated. This ensures that over the lifetime of the lease the tax paid reflects the actual rent payable rather than an estimated amount.

Three-yearly review of leases

In a change to the approach adopted for SDLT, the tax position for a lease subject to LBTT will be reviewed, and a further LBTT return (see LBTT6015) must be submitted on every third anniversary of the lease to take account of any changes that have taken place in the previous three years, for example to the rental payments and any extensions or variations to the lease that have been agreed during that three year period.

Residential leases

Residential leases are generally exempt from LBTT (see LBTT3005). Residential property transactions are transactions where the main subject-matter of the transaction consists entirely of an interest in land that is residential property (or where the transaction is one of a number of linked transactions the main subject-matter of each transaction consists entirely of such an interest). This is covered at LBTT(S)A 2013 section 24(3). If the subject-matter of the transaction (or if any of the linked transactions) includes non-residential property the exemption would not apply and LBTT may be chargeable.

Where six or more separate dwellings are the subject of a single transaction involving the grant of a lease over them, then, those dwellings are treated as not being residential property. This is covered at LBTT(S)A 2013 section 59(8).

However, the exemption does not apply to certain long leases, which are ‘qualifying leases’ for the purposes of Section 1 of the Long Leases (Scotland) Act 2012. These leases are subject to the same rules as a non-residential lease for LBTT purposes. 

Licences to occupy property

Licences to occupy property of any type (whether residential or non-residential) are not currently within the scope of LBTT. No tax is due and an LBTT return does not need to be made. This is covered at LBTT(S)A 2013 Sections 52-53.

Under Scots Law, if the contract meets the four requirements of a lease, they would be regarded as a lease rather than a licence to occupy. If the contract includes all four of the requirements it would be regarded as a lease, no matter how it is described.

A lease contract must include:

• The parties to the contract;
• An exclusive right to occupy a specified property;
• Start and end date or a duration (although a duration of one year may be implied in the contract); and
• Rent payable.

Certain terms may be implied within a contract by statute, for example, a duration for a fixed term of one year may be implied in the contract where a lease for an indefinite term is entered into or a lease continues after a fixed term. It also may be that statute controls the remit of contract, for example, the term of a lease entered into after 9 June 2000 can no longer exceed 175 years under Section 67 of the Abolition of Feudal Tenure etc. (Scotland) Act 2000. Christie v Fife Coal Co confirmed that it may be implied that the start date is the date of entry if this is missing from the agreement.

Some licences are so like leases that they seem practically indistinguishable. However, a key difference is that leases generally confer a ‘real right’ to the tenant, meaning that the tenant cannot be ejected from the property if, for example, the landlord changes (e.g. following a sale of the property), or if the landlord becomes insolvent. A tenant of a non-residential/agricultural lease can assign the real right of a lease to a new tenant.

Licences, by contrast, confer only a ‘personal right’ to the licensee  to use the property. A licensee may face being evicted from the premises they occupy if the ‘landlord’ changes or becomes insolvent.  A licensee cannot assign their personal right over the property to a new licensee. 

Transitional guidance

There are specific transitional rules for leases that were granted prior to the introduction of LBTT. See the transitional leases guidance for more information.

6+ leases granted

Where six or more separate residential dwellings have leases granted over them in a single transaction then the transaction is treated as being non-residential for the purposes of LBTT. This may mean that residential leases can be notifiable and chargeable to LBTT if Section 59(8) is met. In these cases, Schedule 1, Paragraph 3(1) does not apply as the transaction is already treated as a non-residential transaction.