In our last real estate blog, we explained the changes to Land and Building Transaction Tax (LBTT) affecting commercial tenants from 1 April 2018. Today, we look at how to tell whether you are affected.
What is the new LBTT requirement?
Any leases entered into under the LBTT regime from 1 April 2015 are required to submit a further tax return every three years.
How do I know if I am affected?
You will have to submit a three yearly return if:-
- You are the tenant of a lease in Scotland which commenced on or after 1 April 2015;
- You or the original tenant paid tax (LBTT) at the start of the lease.
My lease started after 1 April 2015 – how do I know if tax was paid before?
Revenue Scotland have confirmed that they intend to write out to all the tenants that they believe to be affected from 1 April 2018. However, if there is any doubt, you should contact the lawyer or accountant who acted for you at the start of the lease.
My lawyer dealt with all that – won’t they tell me?
No. Revenue Scotland will only be writing to the tenants named on the original tax return. They have advised that they will not be writing to the agents who submitted the return on the tenant’s behalf. Your solicitor will not be notified by Revenue Scotland.
The grant of the lease was below the threshold value and duration for payment of LBTT. Do I need to submit a three yearly review?
No. So long as nothing has happened which would increase the value of your lease over the threshold, it does not need to be notified.
I submitted a return at commencement of the lease but no tax was paid. Do I need to submit a three yearly review?
That depends on the reason why no tax was paid. If the lease is for 7 years or more it must be notified to Revenue Scotland, even if the value of the lease is under the threshold for tax to be paid. In that case, you will require to submit a three-yearly review confirming that there has been no change to the value which would have resulted in tax being payable.
However, if full relief was claimed on the grant of the lease (e.g. because the Landlord and Tenant are within the same company group), then so long as that relief still applies, there is no need to submit a three-yearly review.
I need to submit a three-yearly review. What information do I give to Revenue Scotland?
The review return requires a Tenant to submit details of:-
- the value of the lease;
- the total amount of tax payable on the lease based on the current calculation of value; and
- the amount of tax actually paid previously.
If the total tax now due exceeds the amount previously paid, then a balancing payment must be made to Revenue Scotland along with the return.
What is the value of my lease?
The LBTT return asks tenants to confirm the “Net Present Value” of the lease. Broadly speaking, this is the value of the total rent payable over the lifetime of the lease, but discounted to take account of future inflation. Revenue Scotland provide an online calculator to work out the value from the annual rent. A solicitor or accountant can also help you with this.
Why would the value now be different from three years ago?
The value is based on the rent actually paid to the Landlord, taking account of VAT and any rent-free period. If the rent is fixed throughout the duration of your lease, the value may be unlikely to change.
If the lease includes provision for rent review, then the actual rent paid after that review is not known when the lease starts. The initial value calculation will have been carried out using a reasonable estimate of the rents payable after the review (often, the initial rent). Once the rent review has been carried out, then the actual rent payable is known and that may affect the value calculation.
10 year lease, with gross starting rent of £20,000 and rent review every three years.
Date of Entry
Net Present Value (year 4 rent onwards estimated at £20,000) = £166,332.11
LBTT due on Net Present Value = £163
Tax payable at commencement = £163
At the third anniversary, the rent review is determined at £22,000.
3 year review
Net Present Value (year 4 rent onwards estimated at £22,000) = £177,362.04
LBTT due on Net Present Value = £273
Tax payable at 3 year review = £273 less £163 already paid = £110
When do I have to submit my return?
The filing period is the same as at the grant of the lease. The review must be submitted (and any additional tax paid to Revenue Scotland) within 30 days of the third anniversary of the start of the lease.
What happens if I don’t submit my return on time?
If the review return is not timeously submitted, the tenant may be liable to late filing penatlies of £100 (rising to £200 after three months) and interest on any additional tax which remains unpaid. The late filing penalties apply even if no additional tax requires to be paid.
In our next blog, we’ll take a look at other circumstances where tenants might need to submit a review return to Revenue Scotland.
However, if you have any queries regarding Land and Buildings Transaction Tax or how it affects your lease, please do not hesitate to contact a member of the Gilson Gray Real Estate team.
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