LBTT6001 - Leases

Chapter 6 of the LBTT legislation guidance covering lease transactions.

In her Budget statement to Parliament on 06 February 2020, the Minister for Public Finance & Digital Economy, Kate Forbes, proposed changes to the LBTT tax rates and bands for non-residential lease transactions. These changes will take effect from 07 February 2020.

This chapter of guidance refers to the taxation of non-residential leases, including agricultural leases, and mainly covers the provisions of schedule 19 to the LBTT(S)A 2013.

Residential leases are generally exempt from LBTT (see LBTT3005) apart from certain long leases which are ‘qualifying leases’ for the purposes of section 1 of the Long Leases (Scotland) Act 2012 and which are not exempt. Qualifying leases are therefore taxed in the same way as non-residential leases.

See LBTT3001 for further guidance on determining whether or not tax is payable. For further information, please see our worked examples.

Separate guidance covering transitional arrangements for SDLT and LBTT is available.

Application of LBTT to leases

The application of LBTT to leases reflects the principle that the transfer of an effective economic interest via a leasing arrangement should be taxed in a similar way to the transfer of an effective economic interest in a conventional sale. 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. 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 must 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.

Licences to occupy property

Licences of any type (whether residential or non-residential) are not within the scope of LBTT. No tax is due and a LBTT return does not need to be made.

In practice, 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 even if the landlord changes (e.g. following a sale of the property), or if the landlord becomes insolvent.

Licences, by contrast, confer only a ‘personal right’ over the property to the licensee. Licensees whose ‘landlord’ changes or goes bust face being ejected from the premises they occupy.

LBTT(S)A 2013 sections 52-53

Three-yearly review of leases

In a change to the approach adopted for SDLT, the tax position for a lease that was 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.

The guidance for leases covers a number of topics and is structured as follows:

Effective date for LBTT lease transactions.

Determining the chargeable consideration for a lease transaction.

Paying tax and making an LBTT return for leases.

Three yearly review of LBTT chargeable for a lease.

LBTT guidance on the requirement that the original tenant makes a further LBTT return where a notifiable lease is later assigned or terminated.

Overview of other LBTT rules regarding leases.

Worked examples for leases

Lease transactions - Transitional provisions – Calculating tax and making a return