Termination of a lease
Where a lease has been notified to Revenue Scotland and is later terminated for any reason (including a renunciation of the lease), the tenant at the point of termination must make a further LBTT return within 30 days of the day after the lease is terminated. This applies if the lease has ended early or on its natural end date.
Note: The date on which the lease is terminated, is the ‘relevant date’ for the purposes of the ‘relevant date’ field in the LBTT return.
The LBTT return must include an assessment of the amount of tax chargeable reflecting any changes that have occurred since the last LBTT return was submitted.
The system will automatically calculate the new Net Present Value when the termination return is completed. The tax rates and bands that applied at the effective date will apply to recalculate the tax on termination of the lease.
This requirement does not apply to leases which have been exempt from charge by virtue of a full relief being claimed on the first return.
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.
Filing and payment on termination
The date the LBTT return must be filed is within 30 days of the termination date. If more tax is payable, payment of the additional tax must be made at the same time as the LBTT return is made.
If less tax is payable at the date of the termination then a claim for repayment of tax should be submitted in the LBTT return. For example, a repayment may arise because rent reviews or turnover rents turned out to be less than had previously been estimated.
An LBTT return must still be submitted even if there have been no changes to the lease since the last return was submitted.
The effective date of a 10-year lease of a restaurant for rent of £25,000 per annum is 1 November 2017. The net present value (NPV) is calculated by using the £25,000 payable in each of the 10 years.
The tenant submitted a LBTT lease return and paid the tax of £579.
The tenant submits their three-yearly review returns in 2020 and 2023. The lease then terminates early on 31 October 2024.
The tenant must complete a review return upon termination to reflect any changes to the lease since the last 3-year review return was submitted. The return must be made no later than 30 November 2024. The relevant date for the termination return is 31 October 2024.
The LBTT payable will be calculated for the lease up to the termination date using the tax rates and bands that were in force at the effective date. The NPV is lower than originally returned and less tax is due than has already been paid, resulting in an LBTT overpayment of £551.
When the tenant or agent completes their termination return, they should complete ‘YES’ that they are claiming a repayment of £551. The NPV will be automatically calculated when the termination return is completed.
The effective date of a 10-year lease of a restaurant for rent of £255,000 per annum is 1 April 2020. The net present value (NPV) is calculated using the £255,000 payable in each of the 10 years.
An LBTT return was submitted. The calculated NPV was £2,120,734.65 and tax of £20,914 paid.
The tenant submits three-yearly review returns in 2023, 2026 and 2029. The tax rates and bands that applied at the effective date of 1 April 2020 will apply to recalculate the tax at each review date.
The lease then terminates at its natural expiry on 31 March 2030. This is the relevant date for the purposes of the return.
The tenant must complete a return upon termination to reflect any changes that have been made to the lease since the last return was submitted. Their return must be made no later than 30 April 2030. The tax rates and bands that applied at the effective date of 1 April 2020 will apply to recalculate the tax following termination of the lease.
Where a lease has been notified to Revenue Scotland and is later partially terminated, for any reason, the tenant at the point of termination must make a further LBTT return to Revenue Scotland within 30 days of the day after the lease is partially terminated.
When a partial termination occurs, the existing tenant’s interest is being divided into two lease titles; one which is terminating and one which is continuing.
Where a lease is to be partially terminated, there is no need to file a termination return as only part of the lease terminates early and part of the lease continues. A termination return will be required as normal when the original lease terminates.
If this results in a repayment, this will be claimed through the termination return.
If the 3-yearly review return date arises ahead of the termination date, the changes will be reflected in that review return to show that partial termination has occurred. If this results in a repayment, this can be reclaimed.
Polly is the tenant under a lease where the leased property consists of 2 floors of a building, originally notified under one lease return.
Polly agrees with the landlord that she will partially renounce the lease in respect of one of the floors, but the lease is to continue in operation until its natural end date in respect of the other floor.
There is no need to file a termination return for the part of the lease that is renounced. Instead, a termination return will be required as normal when the full lease has ended.
Any reduction in the overall NPV calculation will be picked up in the next return, whether this is the termination return or the next 3-yearly review return, and any tax to be repaid will be claimed in this return.