Debt as a consideration
Chargeable consideration can be the:
- satisfaction (release) of a debt due to the buyer or owed by the seller, or
- assumption of an existing debt by the buyer.
It does not matter whether it is in part or a whole amount. The debt which has been satisfied, released or assumed determines the amount of the chargeable consideration. That amount cannot exceed the market value of the purchased or transferred property (see LBTT2016).
Assumption of existing debt by the buyer
For the purpose of determining chargeable consideration for a land transaction you assume a debt when:
- a debt is secured on property both immediately before and immediately after a land transaction and the rights or liabilities of any party to the transaction in relation to that debt change;
- there is an agreement between two or more people whereby one or more of them agree to be liable for an existing debt when they were not previously liable for it;
- one party indemnifies another for any liability the other party has in relation to a debt.
In addition, if a debt is discharged or released, in whole or in part, in connection with a land transaction then the amount discharged or released forms chargeable consideration.
Where a property is held in undivided shares by two or more persons (colloquially referred to as being “in joint names”) then, if a secured debt is assumed, the chargeable consideration is the proportion of the debt corresponding to the amount of each person’s individual share of the property.
For example, a £500,000 mortgage originally held by one person now shared with a further person in pro indiviso shares would be £500,000 divided by 2 resulting in chargeable consideration of £250,000.
Debt is defined as an obligation, whether certain or contingent, to pay a sum of money either immediately or at a future date.
There are three worked examples, which show different sets of circumstances where debt may be treated as the chargeable consideration:
Matilda owns her main residence in her sole name but lives there with her partner Luke. Matilda and Luke do not own any other dwellings. Matilda now wants to transfer a half share of her dwelling to Luke for no monetary payment but they will be taking out a new mortgage in joint names.
No LBTT will be payable as there has been no assumption of an existing debt (as it is a new mortgage) so there is no chargeable consideration. No LBTT return is required.
Ben owns his main residence and lives there with his partner Holly, who already owns a buy-to-let dwelling. Ben wants to transfer a one half share of his main residence to Holly, who agrees with Ben that she will be liable for a one half share of Ben’s existing mortgage.
The chargeable consideration will be based on the value of the existing mortgage plus any cash sums paid. The existing mortgage on the dwelling is £300,000. As no cash is being paid, the chargeable consideration will therefore be a half share of the existing mortgage, £150,000.
LBTT will apply on the value of the half share of £150,000. ADS will also apply on the amount of £150,000 as Holly will now own more than one dwelling and she is not selling or disposing of her previous main residence.
If Holly had agreed to be jointly and severally liable along with Ben for the whole of the mortgage then the chargeable consideration would be the whole amount of the mortgage, £300,000, divided by 2 resulting in £150,000.
Pippa and Bob live together in their main residence which they own jointly in equal shares. They also own jointly a holiday home. The main residence is subject to a mortgage for which Pippa and Bob are each liable for a one half share. Bob wants to transfer his half share of their main residence to Pippa, who will become solely liable to repay the mortgage.
The chargeable consideration will be based on the value of the existing mortgage plus any cash sums paid. The existing mortgage on the dwelling is £320,000. As no cash is being paid, the chargeable consideration will therefore be a half share of the existing mortgage, £160,000.
LBTT will apply on the value of the half share of £160,000. As Pippa already owns a share of the dwelling ADS will not apply.
If Bob and Pippa had been jointly and severally liable each to repay the whole of the mortgage, and the lender discharges Bob of his liability, the same result ensues, as Bob’s liability has changed. If the lender does not discharge Bob, but Pippa agrees to indemnify him from his liability to the lender, again the same result ensues. However, if Bob simply transfers his half share to Pippa without being discharged or indemnified from his liability to the lender, there is no LBTT as there is no chargeable consideration – because there has been no change in either Bob or Pippa’s liability for the debt.
Details on the ADS treatment where the transaction involves the acquisition of a further share of a dwelling can be found in the LBTT Technical Bulletin 1.
Pension Fund Transfers
A transaction in which a pension fund purchases property is subject to LBTT where there is chargeable consideration as they are considered to be land transactions.
Whilst such transfers are considered to be land transactions, debt in the form of the liability assumed to pay benefits to pension scheme beneficiaries will not generally be considered to be given as chargeable consideration. However, any consideration given in the form of money or money’s worth for the transfer of the properties will be chargeable to LBTT.
If you are unsure about the application of the legislation to a specific transaction, you may wish to ask for a Revenue Scotland Opinion.
Note: prior to a technical bulletin from December 2017 (LBTT Updates | Revenue Scotland) confirming this position an LBTT liability may have arisen on debt as a consideration. Revenue Scotland will consider claims to repayment of tax from any taxpayers who have filed and paid LBTT on the basis of the view as stated in the October 2016 bulletin either by amendment or by making a Section 107 repayment claim, subject to time conditions.