LBTT6002 - Key concepts

LBTT6002 - Key concepts

LBTT60021 – Substantial performance

This guidance looks at substantial performance and the rules regarding the substantial performance of an agreement for a lease. The rules are covered at LBTT(S)A 2013 Schedule 19, Paragraph 25.

Ordinarily, under Section 63, the effective date of a land transaction is the date of completion. However, there may be instances when the effective date is not the date of completion as substantial performance has occurred.

Substantial performance is constituted by the tenant by either;

• taking possession of the subjects of the lease, or   
• making the first payment of rent or the premium.

The same applies to missives for a variation or extension to the term of the lease. Although it should be noted that substantial performance of a variation to extend an existing lease does not take place until the expiry of the existing lease.

Agreement for lease – substantial performance

A landlord and tenant may enter into an agreement for lease (including missives not constituting a lease) before the formal lease. Where substantial performance takes place before the formal lease having been executed, the agreement is treated as if it were the grant of a lease (referred to as a ‘notional lease’). The notional lease is treated as starting on the date it was substantially performed in accordance with the agreement between the parties. The effective date of the notional lease is the date when the agreement is substantially performed.

Example

Term, rent and any other consideration

If at a later time a lease is formally executed (referred to as the ‘actual lease’), then LBTT rules apply as if the notional lease was granted on the date it was substantially performed for a term which begins on the date of substantial performance and ends in accordance with the dates set out in the actual lease. The consideration is the total rent payable over that term and any other consideration given for the agreement or the actual lease. The actual lease must either be in conformity with, or relate to substantially the same premises and term as, the agreement. The actual lease is disregarded for LBTT except with regard to section 34 (return or further return in consequence of later linked transaction) - see below. 

Treated as linked

The grant of the notional lease and the grant of the actual lease are treated as linked, regardless of whether the linked transactions rules within section 57 LBTT(S)A 2013 would have linked them. 

Section 34 LBTT(S)A 2013 applies to the tenant under the actual lease. The tenant under the actual lease (rather than the tenant under the notional lease) is liable for any tax or additional tax due in relation to the notional lease. The tenant under the actual lease will be required to make a return in respect of the notional lease within 30 days of the effective date of the actual lease where it was not notifiable previously. 

Repayment of annulled agreement for lease 

The tenant can claim a repayment, where the agreement (to any extent) is rescinded or annulled before the lease was signed (executed). The repayment must be claimed by an amendment (to the extent it is rescinded or annulled) to the LBTT return in respect of the agreement for lease.

LBTT60022 – Effective Date

This page covers the definition of the effective date for an LBTT lease transaction. The relevant legislation can be found at LBTT(S)A 2013 section 63.

The date at which the liability to LBTT arises (the tax point) for a new LBTT lease is known as the effective date of the transaction. The effective date is also used to determine when other obligations in relation to the tax must be fulfilled, for example, it starts the 3-yearly review cycle and dictates when a lease return is required to be filed (within 30 days of the effective date). It is also the rates and bands in place at the effective date which will be used to calculate how much tax is due.

Determining the Effective Date

There are three different scenarios to consider when determining what the effective date is for a lease transaction. They are:

• Leases where there is no initial contract, such as missives of let (or an agreement for lease), and the parties simply proceed straight to signing a formal lease;
• Leases which are created solely by an initial contract, such as missives of let (or an agreement for lease), with no formal lease to be signed thereafter; and 
• Leases which are created by an initial contract, such as missives of let (or an agreement for lease), which are to be followed by the signing of a formal lease.

The effective date in relation to a formal lease which has been preceded by an initial contract such as missives of let (or an agreement for lease) further depends upon whether the initial contract has been substantially performed before the signing of a formal lease.

Formal lease with no initial contract

If there is no missives of let or an agreement for lease, the effective date of the lease is the date of grant of the formal lease, or when it is constituted in any other way.

The date of grant of a formal lease in Scotland (i.e. the effective date of the lease) is the last date of execution/signing of the lease. The usual practice is for both parties to sign the same engrossed document (a legal document of which is in its final form) or to send counterpart copies to each party to sign for counterpart execution.

Accordingly, unless the parties meet to sign the document or the counterparts are signed on the same day, one party inevitably signs later than the other.  As a result, Scottish leases commonly bear two dates, being the actual dates of execution/signing by the parties. Where the document is signed on different dates, it is the latest date of signing which is the effective date.

Examples

Initial contract with no formal lease

The date of grant of a lease constituted by missives of let which are not to be followed by a formal lease is the date of conclusion of missives. The conclusion date (effective date) is the last date of execution/signing of the missives.

Initial contract followed by formal lease

The following applies when the missives of let are followed by the execution of the formal lease. The rules can be found at LBTT(S)A 2013 Schedule 19, Paragraph 26.

Where a lease is agreed by concluded missives of let (the ‘first lease’), and the execution of a lease (the ‘second lease’) takes place at a later date, the first lease is treated as if it were a lease granted on the date the missives of let were concluded, for a term which begins with that date and ends at the end of the term of the second lease. The consideration is the total rent payable over that term, and any other consideration given for the first or the second lease. 

The second lease must be either in conformity with, or relate to substantially the same premises and term as, the first lease.

The grant of the first lease and the grant of the second lease are linked, regardless of whether the linked transactions rules at section 57 LBTT(S)A 2013 would have linked them. The tenant under the second lease is liable for any tax, or additional tax, due in relation to the first lease. The original return for the first lease may need to be amended to reflect the adjusted basis of the first lease following the execution of the second lease.

The second lease is disregarded for the purposes of the tax unless an LBTT return is required because there is a second transaction that is linked to the first transaction and makes the first transaction notifiable.

The effective date used  is the effective date of the first lease, as the grant of the second lease is disregarded. 

The normal rules apply to determine the effective date of the first lease.

LBTT60023 – Relevant Date for Lease Transactions

The relevant date of a transaction or lease event triggers the need for a return to be filed within 30 days. Section 36 LBTT(S)A 2013 defines what the relevant date is for different transactions within the LBTT regime.

The Relevant Date field must be completed when submitting a LBTT return. The relevant date on lease transactions can be when any of the following events take place:

• A grant of a new lease – the relevant date is the same date as the effective date
• 3-year review – the relevant date is the date of the 3-year review (3^rd anniversary from the effective date of the original lease transaction and every 3 years thereafter)
• Assignation of a lease – the relevant date is the date when the lease was assigned
• Termination of lease – the relevant date is the date when the lease was terminated
• Later linked transaction – the relevant date is when the later linked transaction takes place. 
• A lease that continues after a fixed term – the relevant date is the date of the end of the one-year period when the lease became notifiable. 
• Leases for an indefinite term –  the relevant date is the date of the end of the deemed one-year period when the lease became notifiable.
• Lease variation to increase rent or term that requires a return under paragraph 30 – the date from which the variation which results in the lease becoming notifiable.

LBTT60024 – The term of a lease

Leases for a Fixed Term

A lease for a fixed term is one whose term can be ascertained at the time of grant. The term could be set out in the lease itself or in related documents. This includes a lease worded so that it ends on a specific date or one where the term is a specific length of time from the date of grant.

The term of a lease for a fixed term is taken to be:

• the contractual term specified in the lease; or
• the period from and including the date of the grant of the lease until the end of the contractual term.

When applying the lease rules to a lease for a fixed term, any contingency which might lead to the lease being terminated early or any right of either party to terminate or renew the lease (such as a break clause or an option to renew) are to be disregarded. This is covered at LBTT(S)A 2013 Schedule 19, Paragraph 19.

Leases that continue after a Fixed Term

The set of rules below apply in relation to leases subject to LBTT. The rules are covered at LBTT(S)A 2013 Schedule 19, Paragraphs 20-21.

A lease may continue after its fixed term by agreement (whether informal or formal) between the parties or by the operation of law (tacit relocation). Such a lease is treated as if it were a lease for the original fixed term and no longer.  If it continues after the end of the term, it is treated as if it were a lease for one year longer. As it continues, each year a further year is added to the term of the lease. 

If the lease was previously notifiable, LBTT returns are not required each time the lease continues, and the details are included in the next three-year return. 

Where a lease would be treated as continuing after a fixed term but the lease actually terminates at a time during that period, the lease is to be treated as continuing only until the time which it terminates.

Where a lease transaction was not previously notifiable and subsequently becomes notifiable because of the continuation of the lease beyond its fixed term, a LBTT return will be required within 30 days of the day after the end of the one-year period when it became notifiable. 

The assessment of the amount of tax chargeable should be calculated using the tax rates and bands that were in force at the effective date of the original lease. Any additional tax due must be paid at the same time as the LBTT return is made.

Note: The date of the end of the one-year period when the lease became notifiable is the ‘relevant date’ for the purposes of the ‘relevant date’ field in the LBTT return.

Leases that continue after a fixed term: grant of new lease 

Where a lease continues beyond its fixed term and during the one year period after the fixed term end date a new lease is granted to the tenant for the same (or substantially the same) premises, then the new lease is treated as beginning immediately after the original fixed term. 

Any rent which was payable under the original lease after the end of the fixed term is treated as payable under the new lease. 

If the original lease has been extended more than once then the new lease is treated as beginning immediately after the end of the original lease as previously extended. 

A Lease that has an Indefinite Term

Where a lease is granted for an indefinite term the legislation at LBTT(S)A 2013 Schedule 19, Paragraph 22 sets out how a lease should be treated. A lease for an indefinite term includes an interest or right terminable by a period of notice or by notice at any time.

If the term can be ascertained from the lease contract or agreement for lease, a lease is not treated as being for an indefinite term.

For the purpose of notifiable transactions, a lease with an indefinite term is defined as a lease for a term of less than seven years (see LBTT6010 - Making a return and paying tax for a lease | Revenue Scotland).

A lease for an indefinite term is treated as a lease for a fixed term of one year. If it continues, it is treated as a lease for a fixed term of two years, then three years, and so on. 

Where a lease transaction was not previously notifiable and subsequently becomes notifiable because of the continuation of the lease, a LBTT return will be required within 30 days of the day after the end of the one-year period when it became notifiable. 

The assessment of the amount of tax chargeable should be calculated using the tax rates and bands that were in force at the effective date of the original lease. Any additional tax due must be paid at the same time as the LBTT return is made.

Note: The date of the end of the one-year period when the lease became notifiable is the ‘relevant date’ for the purposes of the ‘relevant date’ field in the LBTT return.

Tacit Relocation

Tacit Relocation in Scots Law is a principle whereby leases are renewed on the same conditions as previously existed if there is no notice of termination, subject to a minimum period of one year. 

Where a lease is not terminated, and continues after its fixed term under a period of tacit relocation, the tenant does not need to submit a return at the natural termination date. The lease is treated as if it were a lease continuing longer than the original agreed termination date. A further LBTT return isn’t required for each year the lease continues. Where the lease was previously notified to Revenue Scotland, the new details should be included in the next three-year review return in respect of the original lease, or in a termination return, if the lease ends before the next three yearly review date.

Example

Backdated lease granted after holding over

Where:

• Paragraph 20 applies to treat the original lease as if it were a lease for a fixed term 1 year longer than the original term;
• During that 1 year period, the tenant under that lease is granted a new lease of the same or substantially the same premises, and
• The term of the new lease begins during that 1 year period

then, under Paragraph 21, the term of the new lease is treated as beginning immediately after the original fixed term.

Any rent which would be payable under the original lease in respect of that 1 year period but for this Paragraph is to be treated as payable under the new lease.

Where the fixed term of a lease has previously been extended under Paragraph 20, this paragraph applies as if references to the original term were references to the fixed term as previously so extended.

LBTT60025 – Linked Leases

Transactions are ‘linked’ under section 57 LBTT(S)A for the purposes of LBTT if they form part of:

• a single scheme, arrangement, or
• series of transactions

between the same parties (or connected persons).

For leases, the tax treatment depends on whether they are linked by way of a single scheme or arrangement or as a series of leases (‘successive’ linked leases).

Where leases of two or more properties are negotiated as a single arrangement between the same or connected parties, the transactions will be treated as linked. 

If the successive lease rules do not apply (see below), then tax on linked leases is calculated under LBTT(S)A 2013 Schedule 19, Paragraph 5 (LBTT6011 - Tax due on the rent | Revenue Scotland).

Where the effective date of the original or earlier transaction was before LBTT was introduced on 1 April 2015 the general linked transactions rules at section 57 and the successive linked lease rules do not apply.

Example

Successive Linked Leases

Successive leases of substantially the same premises and which are linked transactions are treated as one lease for the purposes of LBTT. Successive linked leases are treated as being granted at the time of the grant of the first lease in the series, for a term equal to the aggregate of the terms of all the leases and in consideration of the rent payable under all the leases. This is covered at LBTT(S)A 2013 Schedule 19, Paragraph 23.

The grant of later leases in the series is disregarded for the purposes of the LBTT legislation, unless section 34 is triggered (return or further return in consequence of later linked transaction). Under section 34, the tenant must make an LBTT return within 30 days from the day after the effective date of the later transaction where:

• The transaction becomes notifiable as a result of the later transaction;
• Tax is now payable on the earlier transaction, where none was due before; or
• Additional tax is now due on the earlier transaction. 

The return must include an assessment of the amount of tax that (on the basis of the information contained in the return) is chargeable as a result of the later transaction. The tax chargeable should be calculated using the tax rates and bands that were in force at the effective date of the earlier transaction. The rules can be found at LBTT(S)A 2013 Section 34.

Any consideration other than rent payable on the original lease or on any of the successive linked leases would be charged under the provisions of section 26. See LBTT60052 for further information.

The renewal of a lease will not be treated as a successive lease if it can be shown to have been negotiated at arm’s length. For example, if the original or earlier lease expired naturally, contained no right or compulsion of either party to renew and/or was renewed following entirely new negotiations, as would apply to a new tenant. If this cannot be evidenced the successive lease rules apply.

Example