Assignation of a lease
Where a lease has been notified to Revenue Scotland and is later assigned, the assignor (the outgoing tenant) must make a further LBTT return to Revenue Scotland within 30 days of the day after the lease was assigned.
Note: The date on which the lease is assigned, is the ‘relevant date’ for the purposes of the ‘relevant date’ field in the LBTT return.
The LBTT return made by the assignor must include an assessment of the amount of tax chargeable reflecting any changes that have been made to the lease since the last return was submitted.
It is important to note that in the case of an assignation, the assignee (the new tenant) will be required to make an LBTT return on the three-yearly review date of the effective date of the original lease. This cycle does not start again upon assignation. For example, an assignation made in year two will still require a return in year three, unless the lease is terminated before then.
This requirement does not apply to leases which have been exempt by virtue of a full relief being claimed on the first return and the assignee is not eligible to claim this relief. The assignation is treated as being the grant of a new lease (see below). This does not apply where the relief in question is group relief, reconstruction relief, acquisition relief or charities relief and is withdrawn as a result of a disqualifying event occurring before the effective date of the assignation.
If an assignation occurs between parties where Schedule 17 is engaged (partnerships) and the sum of lower proportions reduces the chargeable consideration to nil, then an assignation return is not required for the lease transaction. This is because the original lease transaction would not have been notifiable. The rules applicable for lease transactions under Schedule 17 are found at Part 6.
Assignation of a Lease: Responsibilities of the Assignee
Where a lease is assigned the assignee (the new tenant) assumes the assignor’s (the previous tenant’s) duties in relation to LBTT. These rules are covered at LBTT(S)A 2013 Schedule 19, Paragraph 28. The following requirements to submit an LBTT return (or further LBTT return) apply to the new tenant:
- where contingency ceases or consideration is ascertained – see LBTT4021;
- in consequence of a later linked transaction – see LBTT4015;
- on every third anniversary – see LBTT6007;
- on assignation or termination of the lease – see LBTT6017;
- where a lease for a fixed term continues after the end of the term – see LBTT60024;
- in relation to a lease for an indefinite term – see LBTT6021; and
- where a transaction becomes notifiable because of a variation to rent or term – see LBTT6029.
Anything previously done by the previous tenant in relation to the lease is to be treated as if it was done by the new tenant. See LBTT6009 for guidance on the review of a lease, which was originally notified and is later assigned or terminated.
This rule does not apply if the assignation of the lease is treated as the grant of a lease by the assignor, see below.
The incoming tenant does not have to submit three yearly lease review returns if the assignation is not notifiable.
The assignor is liable for LBTT in the pre-assignation period. The assignee is liable for LBTT in the post-assignation period. Depending on the facts and also the time that has passed, it may be for the assignee to contact the assignor to make them aware.
If there is LBTT which was payable in the pre-assignation period but hasn’t been paid at the time of assignation, that is a live debt and remains the responsibility of the outgoing tenants.
Where the additional LBTT arises because of changes to the rents for the pre-assignation period which only emerges post-assignation, the new tenant will be liable for any additional LBTT payable on the lease. The new tenant and outgoing tenant should confirm all obligations and amounts of tax declared are correct and up-to-date when the assignation was agreed, as well as taking into account any amount of premium payable for the assignation transaction. The additional amounts would show on the 3-yearly review return.
If the incoming tenant pays for the assignation, they will have to submit an LBTT conveyance return where the level of premium means that the acquisition is notifiable.
Note: The nil rate band is available for such conveyance returns.
Any artificial arrangements concerning partnership transactions are likely to fall foul of the Scottish General Anti-Avoidance Rule (see RSTP8001) even where the schedule does not contain a specific Targeted Anti-Avoidance Rule (TAAR) for the relevant transaction.
Assignation of a lease treated as the grant of a lease
Rules covering circumstances where the assignation of a lease is treated as the grant of a lease are found at LBTT(S)A 2013 Schedule 19, Paragraph 27.
Where one of the following tax reliefs was claimed on the grant of a lease:
- sale and leaseback relief – see LBTT3011;
- relief for alternative finance investment bonds – see LBTT3021;
- group relief – see LBTT3025;
- reconstruction relief or acquisition relief – see LBTT3029;
- charities relief – see LBTT3035; or
- public bodies relief – see LBTT3040,
and the lease is assigned to a different tenant and none of those tax reliefs would apply, then the assignation is treated as the grant of a new lease by the assignor for the remaining term of the lease and on the terms agreed to by the assignee.
This rule does not apply where group relief, reconstruction relief, acquisition relief or charities relief was claimed on the grant of the lease but has been withdrawn as a result of a disqualifying event prior to the effective date of the assignation. A disqualifying event means:
- in relation to the withdrawal of group relief, the event falling within paragraphs 14 and 15 of schedule 10 (purchaser ceasing to be a member of the same group as the seller), as read with paragraphs 32 to 40 of that schedule,
- in relation to the withdrawal of reconstruction relief or acquisition relief, the change in control of the acquiring company mentioned in paragraphs 13 and 14 of schedule 11 or, as the case may be, the event mentioned in paragraphs 22 to 24 or 25 to 28 of that schedule,
- in relation to the withdrawal of charities relief, a disqualifying event as defined in paragraph 5 or 6 of schedule 13.
Filing and payment on assignation
The date the LBTT return must be filed is within 30 days of the assignation 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 assignation 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.
Examples
The effective date of a 10-year lease of a shop let for rent of £10,000 per annum is 1 November 2015. The net present value (NPV) is calculated using the £10,000 payable in each of the 10 years.
Whilst the NPV does not result in any liability to tax the transaction is still notifiable and an LBTT return was submitted by Tenant A.
On 1 August 2017, the lease was assigned to Tenant B. At the point the lease is assigned Tenant A must complete a return to reflect any changes that have been made to the lease since the last LBTT return was submitted. This return must be submitted no later than 31 August 2017.
The obligation to file LBTT returns and pay any tax now passes to Tenant B. The return made upon assignation does not affect the cycle in which three-yearly review returns are due. The date of the next three-year review return will be 1 November 2018, the third anniversary of the effective date of the lease. Tenant B must make this review return no later than 1 December 2018.
A factory was let to Tenant A for 10-years with an effective date of 15 September 2016. The annual rent paid by Tenant A was £85,000.
The net present value (NPV) is calculated to be £706,911.45.
The NPV amount is over the non-residential threshold of £150,000, therefore LBTT is charged at the current rate of 1% on the amount above £150,000 and the LBTT due is £5,569.
Tenant A submitted an LBTT return and paid £5,569 within 30 days from the effective date.
On 10 September 2018, Tenant A assigned the lease to Tenant B. The relevant date of the assignation is the date it is assigned. This is the date which must be inserted in to the relevant date field in the assignation return.
Tenant A, as the assignor (outgoing tenant), completed an assignation return that included any changes made to the lease since their last LBTT return and paid any tax chargeable. The tax due was calculated using the tax rates and bands in force on the effective date of 15 September 2016. The assignation return was submitted within 30 days of the date it is assigned, in this example, no later than 10 October 2018.
The effective date remains the same (i.e. 15 September 2016).
The obligation to file LBTT returns and pay any tax now passes to Tenant B. The 3-year review anniversary remains unchanged, with the first 3 yearly review date being 15 September 2019. This review return must be submitted no later than 15 October 2019. Further returns are required on the following third anniversaries, unless the lease is assigned or terminated.
Tenant B paid a premium of £200,000 for the assignation of the lease. As the premium is over the notifiable threshold of £40,000, Tenant B will have to submit their own LBTT return within 30 days from the assignation date and pay the LBTT of £1,500.
Note: if the premium paid was £50,000 it would still be notifiable as it is over the notifiable threshold of £40,000 but no LBTT would be payable.
Partial assignation of a lease
Where a lease has been notified to Revenue Scotland and is later partially assigned, the existing tenant (assignor) must make a further LBTT return to Revenue Scotland within 30 days of the day after the lease was partially assigned.
The LBTT return made by the assignor must include an assessment of the amount of tax chargeable for the lease as a whole, reflecting any changes that have been made to the lease since the latest return was submitted for the part of the lease assigned. If a premium was paid for the grant of the original lease this (and the associated tax paid in relation to it) would not need to be included on the assignation return. As this would currently require manual intervention from Revenue Scotland to ensure our system is correct, the assignor should contact Revenue Scotland to explain the transaction. Revenue Scotland can then make sure that the correct details for each part of the lease and the tenant(s) involved are held.
When a partial assignation occurs, the assignor retains their right to the retained part of the leased property. The assignee is assigned the tenant’s rights under the lease to the assigned part of the leased property.
Under a partial assignation, the tenant under part of the lease will change. This is in contrast to subletting, where the leased property is rented out (under a sublease) to a subtenant. In that instance, the tenant becomes the landlord for the separate sublease. Under partial assignation, the landlord remains the same with the assignor retaining part of the lease and the assignee taking the part of the lease that is assigned. The assignor will have no further rights in the leased property partially assigned.
Assigned part of the lease
The part assigned will continue after assignation under the terms of the original lease insofar as amended by the terms on which the partial assignation was agreed. The assignation return will state the terms of the part of the lease assigned, including the amount of rent payable, a description of the property assigned and the remaining term of the lease. A new 3-yearly review cycle will not start, but will continue from the original lease. The assignee will take on the obligations for this part of the lease, including the responsibility to file the 3-year review returns. Any future comparisons of NPV would only look at rent for the part of the lease that has been assigned.
Retained part of the lease
The lease will continue in existence under the terms of the original lease for the part of the lease retained. The 3-year review returns will continue to be required to be filed with comparisons of NPV made from the date of assignation only including rent for the part of the lease that has been retained.
Linked leases
Where there is an assignation of a linked lease to an unconnected party, the leases will no longer be linked post-assignation. The NPV for the post-assignation periods would not take account of the other lease that was previously linked, but the pre-assignation period (and NPV and tax on the assignation return) would include the linked lease.
Example
There is a lease agreement between Bill (landlord) and Stacy (tenant). The lease relates to two floors of an office building. The term of the lease is for 10 years and rent is £100,000 per annum. The NPV for the lease is calculated to be £831,661. The tax is calculated at £6,817 (150,000 at 0% and the rest at 1%).
5 years into the lease, Stacy assigns 50% of the lease (the first floor of the office building) to Graeme. For the remaining 5 years, Stacy is entitled to the second floor of the office building and rent is £50,000 per annum.
For the purposes of LBTT returns, the lease is effectively split in two at the point of partial assignation. Both Stacy and Graeme are required to show the elements they hold and show that tax has been paid. They will input the amounts that reflect the amounts that they have paid over the full term of the lease but override the tax paid figure. There would then be no additional tax or repayment at the 3-yearly review return for either party unless there was a variation in the rent or term since the assignation.
Stacy (Assignor)
On partial assignation, there is a requirement for a return to be completed by the assignor which must include an assessment of the amount of tax chargeable, reflecting any changes that have been made to the lease since the previous return was submitted (either the first return or the return made at the last three year review). The rent or term on the overall lease does not change therefore the assignation would not generate a repayment.
The assignation return should include the same position prior to the assignation. Stacy would input the full £100,000 rent over 10 years with the start date as per the original lease (assuming there have been no changes to the rent or the term). Therefore, (as per a full assignation) there is no tax or overpayment unless the rent or term is varied.
On Stacey’s next 3-year review return, the reality is that she has paid £100,000 rent for 5 years and £50,000 for 5 years. She would input this into the return and the NPV for the retained element would be recalculated to £641,583 with LBTT of £4,915. To prevent repayment at this stage, the tax paid would need to be entered as £4,915, rather than the £6,817 that Stacy originally paid. If the full amount paid was entered, the return would incorrectly calculate a repayment of £1,901.60.
Graeme (Assignee)
The assignee (the new tenant) will be required to make an LBTT return on every 3-yearly review date of the effective date of the original lease post-assignation.
Graeme has to complete a 3-yearly review return for the part of the lease he takes over. He has only taken over the lease for the 5 remaining years but the effective date would be for that of the original return. He would need to enter £0 rent for the first 5 years and then £50,000 for the remaining period. The NPV would be recalculated to £190,078 with LBTT of £400.
To prevent the return incorrectly calculating a repayment, tax paid would need to be entered as £400, rather than the £6,817 that Stacy originally paid.
Bequeathed lease
Where, by operation of law, a lease is bequeathed to a new tenant, this will be treated as an assignation for the purposes of the lease rules.
A bequest of a lease in a testamentary document (i.e. a will) is, in effect, an assignation timed to take effect on death. Accordingly, for the application of the lease rules, whether or not the bequest is effective depends on whether or not the lease itself is assignable. If among the conditions of a lease (whether expressly or by implication) there is a prohibition of assignation, the executor shall be entitled, notwithstanding that condition, to transfer the interest to certain persons and the executor shall be entitled to transfer the interest without consent of the landlord.
Section 6(5) of the LBTT(S)A provides that “Except as otherwise provided, this Act applies however the acquisition is effected, whether by act of the parties, by order of a court or other authority, by or under any enactment or by operation of law”.
Once the beneficiaries are identified, and a beneficiary accepts the transfer of the tenancy, the executor will then complete the necessary conveyancing to transfer the tenancy interests to the beneficiary. This would be treated as an assignation for the lease further returns rules.
However, where the beneficiary does not give consideration, the passing of the lease, whether by will or by the executor on an intestate estate falls within Paragraph 6, Schedule 1 as an exempt transaction.
Informing Revenue Scotland of the change in tenant
Regardless of how the change has come into effect, if there is a change in tenant on a notifiable lease (or the lease becomes notifiable as a result of the change), please inform Revenue Scotland. The new tenant will need to be made aware of their filing obligations in order to reduce the likelihood of penalties occurring.