LBTT Land and Buildings Transaction Tax – Scotland

Key differences between LBTT and SDLT

(LBTT Land and Buildings Transaction Tax – Scotland)

➤ LBTT generally benefits buyers of lower-priced homes more than SDLT but is tougher on those purchasing higher-value properties, with additional taxes for second homes and different refund rules.

When the Land and Buildings Transaction Tax (LBTT) was introduced in Scotland, it was meant to collect a similar amount of tax as the previously used Stamp Duty Land Tax (SDLT) would have collected in Scotland. However, the Scottish Government decided on tax rates and bands that created different effects for different buyers. People buying less expensive properties ended up paying less tax under LBTT than they would have under SDLT, while those buying more expensive properties paid more.

Key Differences and Changes

  • Tax Rate Adjustments: After Scotland announced the LBTT rates, the UK adjusted SDLT to a progressive tax structure, meaning tax rates would increase gradually with the property price. For instance, properties over £250,000 were taxed at 5% under the new SDLT rules, as opposed to 10% under LBTT.
  • Revisions and Responses: In response to the UK’s SDLT adjustments, Scotland revised their LBTT rates and bands in January 2015, which have been in effect since, except for a temporary change during 2020-2021 due to the pandemic.

Additional Charges for Extra Properties

  • Additional Dwelling Supplement (ADS): Both SDLT and LBTT include higher rates for additional residential properties like second homes. However, there are some differences:
    • SDLT: Applies a higher rate for these properties but excludes mixed-use properties from this higher rate.
    • LBTT: Also applies a higher rate (initially 3%, then increased to 6% in 2024) and includes mixed-use properties, requiring a reasonable split of the tax between residential and non-residential parts.

Time Limits for Selling Old Residences

  • SDLT: Buyers have 36 months to sell their previous main residence and can apply for a tax refund of the higher rate if delayed by unforeseen circumstances, such as the COVID-19 pandemic.
  • LBTT: Initially, buyers had 18 months to sell their previous main residence and claim a refund, but this was extended to 36 months. 

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Differing rates between LBTT and SDLT
(LBTT Land and Buildings Transaction Tax – Scotland)

LBTT starts taxing at lower property values and reaches higher rates quicker than SDLT, making it more burdensome for mid to high-priced home purchases in Scotland.

Comparing the Land and Buildings Transaction Tax (LBTT) in Scotland to the Stamp Duty Land Tax (SDLT) in the rest of the UK reveals some differences in their rate structures and how they are applied based on the purchase price of residential properties. Here’s a breakdown of these differences:

Thresholds and Rates

Both LBTT and SDLT are progressive taxes, meaning the amount of tax increases with higher property prices. However, they differ in their starting thresholds and specific rate bands:

LBTT Rates and Bands (as of 1 April 2021)

  • Up to £145,000: 0%
  • £145,001 to £250,000: 2%
  • £250,001 to £325,000: 5%
  • £325,001 to £750,000: 10%
  • Over £750,000: 12%

SDLT Rates and Bands (for purchases that don’t qualify for first-time buyers relief)

  • Up to £250,000: 0%
  • £250,001 to £925,000: 5%
  • £925,001 to £1.5 million: 10%
  • Above £1.5 million: 12%

Key Differences

  • Threshold for Zero Tax: LBTT starts charging at a much lower property value (£145,001) compared to SDLT which starts at £250,001. This means for properties under £250,000, a buyer in Scotland could pay LBTT while a buyer in England or Northern Ireland might not pay any SDLT.
  • Middle Bands: LBTT’s middle bands are narrower and increase the tax rate quicker as property prices rise. For instance, properties between £250,001 and £325,000 are taxed at 5% under LBTT, while the same price bracket falls under the 5% rate for SDLT but continues up to £925,000.
  • Top Rate Threshold: SDLT reaches its top rate of 12% at £1.5 million, whereas LBTT hits this rate at £750,000. Thus, high-value property transactions in Scotland are subject to the top tax rate much earlier than in the rest of the UK.

Owner Occupier Purchases.

To illustrate the differences in the total tax payable under Land and Buildings Transaction Tax (LBTT) and Stamp Duty Land Tax (SDLT) for an owner occupier purchasing a property at different price points, here are examples for properties valued at £150,000, £350,000, and £1 million.

LBTT and SDLT Comparison

  1. Property valued at £150,000:
    • LBTT: £100 
    • SDLT: £0 
  2. Property valued at £350,000:
    • LBTT: £8,350 
    • SDLT: £5,000 
  3. Property valued at £1 million:
    • LBTT: £68,350  
    • SDLT: £53,750  

Practical Implications

For most average-priced homes, the difference in taxation can significantly affect the cost of buying a home:

  • Lower-Priced Homes: Buyers in Scotland pay less or no tax on properties under £145,000, which is beneficial compared to SDLT’s starting point.
  • Mid to High-Priced Homes: Buyers of more expensive homes might find LBTT more burdensome due to earlier entry into higher tax bands compared to SDLT.

Limited Company Purchases.

When comparing the total tax payable under both the Land and Buildings Transaction Tax (LBTT) and Stamp Duty Land Tax (SDLT) for a limited company purchasing properties at different values, here are the simplified total tax amounts for each scenario:

  1. Property Valued at £150,000:
  • LBTT: With 6% ADS, total tax is £9,000.
  • SDLT: Including the 3% surcharge for limited companies, total is £4,500.
  1. Property Valued at £350,000:
  • LBTT: Total tax including 6% ADS is £28,500.
  • SDLT: Total tax, including the 3% surcharge, is £18,000.
  1. Property Valued at £1 Million:
  • LBTT: Total LBTT including 6% ADS is £82,500.
  • SDLT: Total SDLT, including the 3% surcharge, is £73,750.

The Additional Dwelling Supplement (ADS)

(LBTT Land and Buildings Transaction Tax – Scotland)

➤ ADS adds a 6% tax on additional residential property purchases in Scotland, aiming to keep the market accessible for first-time buyers.

ADS adds an extra layer of tax to the standard Land and Buildings Transaction Tax (LBTT) when purchasing additional residential properties.

What is ADS?

ADS is an additional tax imposed on the purchase of any residential property that qualifies as an additional dwelling in Scotland. This includes second homes, rental properties, and holiday homes, among others. It applies under certain conditions and is aimed at ensuring the property market remains accessible for first-time buyers and those seeking to move homes without competing with investors and second-home buyers.

When ADS Applies

ADS is generally payable when:

  • A buyer already owns one or more residential properties globally and is purchasing another in Scotland.
  • The property is not replacing the buyer’s only or main residence.
  • The value of the property or the buyer’s share in the property is £40,000 or more.

For corporate bodies, companies, and certain trusts, ADS applies even if the property purchased is the first residential property they own.

ADS Rate Changes and Legislative Updates

  • As of 1 April 2024, ADS is set at 6% of the total purchase price.
  • The legislation has been updated to extend the timeframe for replacing a main residence from 18 to 36 months for certain transactions, aligning with the effective date of purchase.

ADS Exemptions

You do not need to pay ADS if:

  • You are buying a property that will be your only dwelling after the transaction.
  • The purchase price is under £40,000.
  • You have sold or are selling your only or main residence within 36 months of the new purchase.

Example: Company Purchase in Scotland vs. SDLT in England

Purchase Price: £500,000

LBTT + ADS (Scotland)

  • Total LBTT: £23,350
  • ADS: 6% of £500,000 = £30,000
  • Total Cost (LBTT + ADS): £53,350

SDLT (England)

  • Total SDLT: £12,500
  • 3% additional rate on total £500,000 (£15,000)
  • Total SDLT: £27,500

Non-Residential and Mixed-Use Transactions and ADS

(LBTT Land and Buildings Transaction Tax – Scotland>The Additional Dwelling Supplement (ADS))

➤ Non-residential transactions and commercial mixed-use portions are taxed at lower rates and exempt from ADS, while ADS applies to the residential part of mixed-use properties if valued at £40,000 or more.

Transactions are categorised as non-residential when they primarily involve commercial properties or land used for business purposes. This includes offices, retail spaces, industrial units, and agricultural lands actively used for commercial farming. The significance of classifying a transaction as non-residential lies in the tax rates applied; these transactions are taxed at lower rates compared to residential properties and are exempt from ADS.

Examples of Non-Residential Properties:

  • Commercial offices and shops.
  • Industrial units like factories.
  • Agricultural lands used for farming by deploying commercial machinery.

Evidence for Non-Residential Status:

  • VAT registration specific to the property.
  • Registration for non-domestic rates.
  • Membership in commercial bodies relevant to the property’s use.
  • Commercial licences or registration proving the property’s use in a business.
  • Business accounts demonstrating that the property generates commercial revenue.

Mixed-Use Transactions

When a transaction involves both residential and non-residential properties, the Additional Dwelling Supplement (ADS) applies only to the residential portion. The charge for the residential part must be fairly divided, and if it’s £40,000 or more, a 6% ADS rate is applied. This ADS is then added to the Land and Buildings Transaction Tax (LBTT) calculated using non-residential rates for the mixed transaction.

Example For a Mixed-use Property Transaction

For a mixed-use property transaction involving a ground floor retail shop and four apartments, here’s how the Land and Buildings Transaction Tax (LBTT) would be calculated under the given conditions. The total valuation involves £350,000 for the retail shop (non-residential component) and £650,000 for the four apartments (residential component). The residential element qualifies for multiple dwellings relief (MDR) and the Additional Dwelling Supplement (ADS) also applies.

Non-Residential Component Calculation

  • Total LBTT: £6,000 (non-residential) + £40,400 (residential) = £46,400
  • Total SDLT: £2,000 (2% portion) + £37,500 (5% portion) = £39,500

Further Considerations:

  • Garden or Grounds: If the land is part of the garden or grounds of a residential property, it’s treated as residential and subject to residential rates, unless actively used for commercial purposes.
  • Historic and Current Use: The tax status of a property (residential vs. non-residential) is determined by its use on the effective date of the transaction, but past uses and the habitual use of the property are also considered if they demonstrate a consistent commercial purpose.

ADS Relief for Purchases of Six or More Dwellings

(LBTT Land and Buildings Transaction Tax – Scotland>The Additional Dwelling Supplement (ADS))

➤ When buying six or more dwellings in one transaction, the purchase is classified as non-residential, exempting it from ADS, which reduces the tax significantly.

When a transaction involves the purchase of six or more dwellings, the classification of the transaction shifts from residential to non-residential under the LBTT rules.

Key Principles of This Relief

  1. Non-Residential Classification:
    • The transaction is treated as a non-residential property deal. Non-residential LBTT rates are generally lower compared to residential rates, especially when high-value or numerous properties are involved.
  2. Exemption from ADS:
    • ADS, normally charged at 6% of the purchase price for additional residential properties, does not apply. This can result in a considerable reduction in tax liability, especially for investments involving large amounts of money.
  3. Major Interest Transfer:
    • The relief applies when there is a transfer or purchase of a major interest in six or more separate dwellings. A major interest generally means freehold or an equivalent long-term interest like a leasehold.

Example:  Purchase of Six Separate Dwellings

Scenario: An investor purchases six apartments in a single transaction for a total price of £1.2 million, with each apartment priced at £200,000.  

Without ADS Relief (Treated as Residential):

  • Total Purchase Price: £1,200,000
  • Standard Residential LBTT Calculation:
    • Total LBTT: £102,350
    • ADS: 6% of £1,200,000 = £72,000
  • Total Tax Due Including ADS: £174,350

With ADS Relief (Non-residential Transaction):

  • Total Consideration: £1,200,000
  • Non-residential LBTT Rates:
    • Total LBTT: £48,500
  • ADS: £0 (as the transaction is classified as non-residential)
  • Total Tax Due: £48,500

 

ADS Conclusion

(LBTT Land and Buildings Transaction Tax – Scotland>The Additional Dwelling Supplement (ADS))

➤ ADS aims to reduce competition for homes and generate government revenue but could decrease rental property supply and increase rents.

Key Impacts of ADS:

  • Market Cooling for Buy-to-Let and Second Homes: By making additional property acquisitions more expensive, ADS aims to cool down overheated segments of the market, particularly in areas where competition for housing makes accessibility difficult for first-time buyers.
  • Revenue Generation: ADS also serves as a source of revenue for the government, which can potentially be used to fund affordable housing projects or other public services.

Challenges Associated with ADS:

  • Potential Decrease in Rental Property Supply: One unintended consequence of ADS might be a reduction in the number of properties available for rent, as investors could be deterred by the higher costs. This could lead to shortages in rental housing, particularly in high-demand urban areas.
  • Increased Rental Costs: Landlords might pass on the extra costs to tenants, leading to higher rents. This could paradoxically make housing less affordable for individuals who are unable to buy their own homes.
  • Market Distortions: The ADS might distort property market dynamics, leading to unintended consequences such as the stalling of property sales or shifts in investment to other areas or types of property not subject to ADS.

LBTT on Leases

(LBTT Land and Buildings Transaction Tax – Scotland)

➤ LBTT applies to non-residential leases in Scotland, requiring tenants to submit returns, and taxes are based on the Net Present Value and lease premiums, with periodic three-yearly reviews and certain exemptions.

Introduced on April 1, 2015, the Land and Buildings Transaction Tax (LBTT) is applicable to various real estate transactions in Scotland, including the leasing of non-residential land and properties. This overview aims to clarify the responsibilities and tax implications for tenants under the LBTT framework, particularly focusing on non-residential leases.

Key Aspects of LBTT for Leases

  • Applicability: LBTT applies to non-residential leases granted on or after April 1, 2015. Tenants are required to submit an LBTT return if the lease is notifiable.
  • Lease Transactions: Both the rent and any other chargeable consideration (like lease premiums) are subject to LBTT if they exceed the specified thresholds.

Lease Rates and Bands

LBTT’s structure for leases involves calculating the Net Present Value (NPV) of all rent payable over the term of the lease. The rates applied depend on when the lease transaction occurred:

  • For transactions from February 7, 2020, onwards:
    • 0% on NPV up to £150,000
    • 1% on NPV from £150,001 to £2,000,000
    • 2% on NPV above £2,000,000

Lease Premiums

For lease premiums, the standard non-residential tax rates for LBTT apply. If the ‘relevant rent’ is at least £1,000 per year, no nil rate tax band applies, and the premium is taxed at the next applicable LBTT rate.

  • Current Tax Rates for Lease Premiums (as of January 25, 2019):
    • 0% on purchase prices up to £150,000
    • 1% on purchase prices from £150,001 to £250,000
    • 5% on purchase prices above £250,000

Reporting and Reviews

  • Three-Yearly Review: The tax position of a lease under LBTT must be reviewed every three years. This involves submitting a further LBTT return to reflect any changes in the lease terms or rent paid.
  • Lease Extensions or Variations: Any extensions or variations agreed upon during the lease period must be included in the LBTT return at the three-year review.

Exemptions and Special Cases

  • Residential Leases: Generally, residential leases are exempt from LBTT unless linked to transactions involving non-residential property or certain long leases defined under the Long Leases (Scotland) Act 2012.
  • Multiple Dwellings: Transactions involving six or more residential dwellings leased in a single transaction are treated as non-residential for LBTT purposes.

Licences to Occupy

In Scottish law, a clear distinction is made between leases and licences to occupy:

  • Leases confer an exclusive right to occupy and are considered ‘real rights’, providing more security to the tenant even if the landlord’s circumstances change.
  • Licences do not confer an exclusive right to occupy and provide only a ‘personal right’, which does not offer the same security as leases.

Transitional Guidance and Special Provisions

There are specific transitional rules for leases that were in effect before LBTT was introduced. Moreover, when more than six leases are granted in a single transaction, the entire transaction is treated as non-residential.

LBTT. Options and Rights of Pre-emption

(LBTT Land and Buildings Transaction Tax – Scotland)

➤ LBTT applies when acquiring or exercising options or rights of pre-emption to buy property in Scotland, and taxes are calculated on the total value of linked transactions

Options: An option gives the holder the right to buy a property at a predetermined price within a specific period. This is often used in property development and investment to secure a purchase price and allows the investor to plan or obtain necessary approvals or financing before committing to the purchase.

Rights of Pre-emption: Also known as the right of first refusal, this is a contractual agreement where the holder has the right to buy a property before it is offered to others. Unlike options, the price may not be predetermined and is typically determined at the time the right is exercised. This is common among business partners or family members as a way to maintain control over who can buy into a property or business.

LBTT Implications for Options and Rights of Pre-emption

  • LBTT on Acquisition: The acquisition of an option or a right of pre-emption is considered a land transaction under LBTT legislation. LBTT is due based on the price paid for the grant of the option or the right of pre-emption.
  • Exercise of the Rights: When an option or a right of pre-emption is exercised, this constitutes a separate land transaction. LBTT is then calculated on the total consideration paid for the property, including any initial payment made for the grant of the option or right. Importantly, the consideration for both the initial grant and the actual property purchase are aggregated if the transactions are linked.
  • Linked Transactions: Transactions are considered linked if they involve the same parties and are part of a single arrangement or scheme. If linked, the total tax liability might increase as the aggregated consideration could push the transaction into a higher tax bracket.
  • Notification and Payment of LBTT: The grant of an option or a right of pre-emption requires a LBTT return if the chargeable consideration exceeds the nil rate tax band (£145,000 as of the latest guidelines). Furthermore, the exercise of such an option or right that leads to an actual property transaction also requires a separate LBTT return if the total consideration (including the initial grant) exceeds £40,000.

 Example. An Option Transaction

Initial Grant of the Option

Scenario Details:

  • Date: April 2nd
  • Parties: Investor A (buyer) and B (seller)
  • Property: A house in Scotland
  • Option Fee: £160,000
  • Predetermined Purchase Price of the House: £500,000

Tax Implications of the Option Grant:

  • Since the option fee of £160,000 exceeds the nil rate LBTT band (£145,000), it triggers a requirement for a LBTT return.
  • LBTT Liability: The LBTT rate applicable for transactions just above £145,000 would be the next rate up from zero. Assuming this rate is 2% (for illustration), the LBTT due on the option fee would be 2% of £15,000 (the amount above £145,000), resulting in a tax liability of £300.
  • LBTT Return: Investor A must submit an LBTT return and pay the £300 tax due on the acquisition of the option.

Exercise of the Option

Scenario Details:

  • Date of Exercise: December 1st
  • Completion of Sale: Same day, December 1st

Tax Implications of the Property Purchase:

  • Total Consideration: £660,000 (£500,000 purchase price + £160,000 option fee)
  • LBTT Calculation: Assuming the LBTT rates are as follows:
    • 0% on amounts up to £150,000
    • 1% on amounts from £150,001 to £250,000
    • 5% on amounts above £250,000

The LBTT would be calculated on the total consideration:

  • £0 on the first £150,000
  • £1,000 on the next £100,000 (£150,001 to £250,000)
  • £20,500 on the remaining £410,000 (£250,001 to £660,000)

Thus, the total LBTT due on the property purchase would be £21,500.

Credit for Previously Paid LBTT:

  • Since Investor A already paid £300 LBTT on the option fee, this amount is credited against the total LBTT liability for the property transaction. Hence, the final LBTT payable at this stage would be £21,200 (£21,500 – £300).

Final Considerations

  • LBTT Return on Exercise: Investor A must submit another LBTT return for the property purchase reflecting the total consideration, the calculated LBTT, and the credit for the LBTT paid at the time of the option acquisition.
  • Linking Transactions: If the transactions are considered linked (which they typically would be in this scenario since the option and the subsequent property purchase involve the same parties and are part of a prearranged agreement), the LBTT is calculated on the aggregated value of the transactions.
  • Record Keeping: It’s essential for Investor A to keep detailed records of all transactions, tax payments, and returns. These documents must be readily available for review by tax authorities if required.

Main LBTT Exemptions And Reliefs

(LBTT Land and Buildings Transaction Tax – Scotland)

Comment: This chapter explains the key exemptions and reliefs under the Land and Buildings Transaction Tax (LBTT) in Scotland.

Key Points:

  • Exemptions include property gifts, Crown acquisitions, divorce-related transfers, and inheritance.
  • Multiple Dwellings Relief (MDR) reduces tax for buying several properties together.
  • First-Time Buyer Relief exempts the first £175,000 from tax.
  • Property traders and housebuilders can receive relief to prevent transaction chain breakdowns and facilitate part-exchange deals.

Main Principles:

  • Exemptions: Transactions with no payment, property gifts, Crown acquisitions, court-ordered transfers, and inheritance are exempt from LBTT.
  • Multiple Dwellings Relief (MDR): Reduces tax on bulk property purchases.
  • First-Time Buyer Relief: Helps first-time buyers by exempting the first £175,000 of their property’s price.
  • Property Trader Reliefs: Support the property market by relieving tax for traders and builders in specific scenarios.

LBTT Exempt Transactions

(LBTT Land and Buildings Transaction Tax – Scotland>Main LBTT Exemptions And Reliefs)

➤ LBTT exempts transactions with no payment, property gifts with assumed debts, Crown acquisitions, court-ordered property transfers in divorces or civil partnership dissolutions, and property inherited from a deceased person’s estate from the tax.

  1. No Chargeable Consideration (LBTT3003): Transactions where no money or money’s worth changes hands are exempt from LBTT. This typically applies to property gifts where the property is transferred without any payment or return. However, if the property transfer includes the assumption of debt (like a mortgage), then that debt is considered chargeable consideration and could be subject to LBTT, unless specific exemptions apply.
  2. Acquisitions by the Crown (LBTT3004): Transactions involving the acquisition of property by certain Crown bodies or officials are exempt from LBTT. This includes acquisitions by Scottish Ministers, the Scottish Parliamentary Corporate Body, Ministers of the Crown, and similar entities in other UK nations and regions. This exemption facilitates governmental and legislative functions by removing the tax burden from property transactions necessary for public duties.
  3. Transactions in Connection with a Divorce (LBTT3006): Property transactions that are the result of a court order or agreement during a divorce or legal separation are exempt from LBTT. This exemption is designed to ease the financial aspects of distributing property assets when a marriage ends, ensuring that the division of property does not incur additional tax costs.
  4. Transactions in Connection with the Dissolution of a Civil Partnership (LBTT3007): Similar to divorce, transactions that occur due to the dissolution of a civil partnership are also exempt from LBTT. This includes any property distributions that are agreed upon through court orders or mutual agreements between the parties involved, facilitating a fair separation of assets without the added burden of LBTT.
  5. Assent and Appropriations by Personal Representatives (LBTT3008): When property is transferred from a deceased person’s estate to a beneficiary (either through a will or under intestacy rules), the transaction is typically exempt from LBTT. This exemption applies even if the property has outstanding debts, such as a mortgage, assuming no other consideration is involved. This relief is crucial for ensuring that the process of inheriting property is not complicated by tax liabilities, which would otherwise make the process more burdensome for the beneficiaries.

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LBTT3015 – Multiple Dwellings Relief (MDR)

(LBTT Land and Buildings Transaction Tax – Scotland>Main LBTT Exemptions And Reliefs)

➤ Multiple Dwellings Relief (MDR) helps property investors and developers by reducing their tax costs to regular residential rates when buying several properties in one transaction, and it can significantly lower the overall tax liability even when Additional Dwelling Supplement (ADS) applies, provided the relief is claimed correctly.

MDR relief is especially helpful for property investors and developers buying several units, like flats or houses, in a single transaction. It keeps their tax costs comparable to regular residential rates, preventing them from jumping to higher tax brackets because of the combined value of the properties.

Scope of MDR

The relief applies to transactions that include:

  • Multiple residential dwellings, regardless of whether the transaction includes non-residential property.
  • Transactions where residential properties form the bulk of the purchase but may also include some element of non-residential property.

MDR can significantly reduce the amount of LBTT payable, especially in larger transactions involving several properties.

Interaction with Additional Dwelling Supplement (ADS)

ADS is another significant component of the Scottish tax system, which imposes an additional tax on the purchase of secondary properties or buy-to-let investments. While MDR and ADS both relate to transactions involving residential properties, their applications differ:

  • ADS is typically payable on purchases of additional residential properties beyond a buyer’s main home, at a rate of 6% on the total taxable amount.
  • MDR can be claimed even when ADS is applicable, potentially reducing the overall tax liability. For purchases involving six or more residential properties, the properties might be treated as non-residential for tax purposes, thereby exempting them from ADS while still qualifying for MDR.

Claiming MDR

To benefit from MDR, buyers must:

  1. Claim the relief within their original LBTT return at the time of registering the transaction.
  2. Alternatively, they can make an amendment to their LBTT return to claim the relief retrospectively if it was not claimed at the time of the initial filing.

 Example: Calculating MDR

Let’s illustrate how MDR is calculated with a practical example. Assume a limited company purchases four residential properties in a single transaction with a total consideration of £1.2 million, where each property costs £300,000. Additionally, because it’s a limited company purchase, a 6% ADS rate applies to all properties.

  • Step 1: Calculate Average Consideration Per Dwelling
    • Total consideration for dwellings = £1.2 million Number of dwellings = 4 Average consideration per dwelling = £1.2 million / 4 = £300,000
  • Step 2: Calculate LBTT for Each Dwelling
    • Total LBTT per dwelling = £4,600
  • Step 3: Apply ADS
  • ADS at 6% on £300,000 per dwelling = £18,000
  • Total LBTT including ADS per dwelling = £22,600
  • Step 4: Aggregate LBTT for All Dwellings
    • Total LBTT for all dwellings = £22,600 x 4 = £90,400
  • Step 5: Calculate Minimum Prescribed Amount (MPA)
    • Minimum LBTT due, often set at 25% of what the total tax would be without MDR:
    • Total tax without relief (TT) = £90,400
    • MPA = 25% of £90,400 = £22,600

Final Tax Due

The amount of LBTT payable is the higher of the aggregated LBTT for all dwellings or the MPA:

  • Total LBTT payable = £90,400 (since it is higher than the MPA)

Conclusion

MDR significantly reduces the tax impact when multiple dwellings are purchased together, providing considerable financial benefits, particularly when paired with ADS calculations.

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LBTT3048 – First-Time Buyer Relief

(LBTT Land and Buildings Transaction Tax – Scotland>Main LBTT Exemptions And Reliefs)

➤ First-Time Buyer Relief under the Land and Buildings Transaction Tax (LBTT) in Scotland exempts first-time buyers from paying tax on the first £175,000 of their property’s price, provided they meet specific conditions such as intending to live in the property as their main residence and not being involved in another property transaction.

First-Time Buyer Relief under the Land and Buildings Transaction Tax (LBTT) in Scotland offers financial relief to first-time homebuyers. This relief was introduced to help first-time buyers afford the purchase of their first home by reducing the amount of tax paid on the transaction.

Key Features of First-Time Buyer Relief:

  1. Tax Relief Amount: The relief exempts first-time buyers from paying LBTT on the first £175,000 of the property price. For properties costing more than £175,000, LBTT is only paid on the amount exceeding £175,000.This raises the threshold from the standard £145,000 to £175,000, potentially reducing tax costs for buyers by up to £600.
  2. Eligibility Period: The relief applies to transactions where the contract was entered into on or after February 9, 2018, and the effective date of the transaction is on or after June 30, 2018.
  3. Conditions for Eligibility:
  • The property must be residential and include a dwelling.
  • The buyer must be a first-time buyer intending to occupy the property as their only or main residence.
  • The transaction should not be linked to another property transaction.
  • The purchase must not be subject to Additional Dwelling Supplement (ADS).
  1. Claiming the Relief: First-time buyers claim this relief when they submit their LBTT return or amend an existing return. It’s important that all the conditions are met; if one buyer in a joint purchase does not qualify, then relief cannot be claimed for any part of the transaction.

Impact of Temporary Changes:

During the COVID-19 pandemic, the nil rate band for all residential property transactions was temporarily increased to £250,000 (effective from July 15, 2020, to March 31, 2021). This adjustment meant that the first-time buyer relief, although still claimable, did not provide any additional benefit during this period because the temporary nil rate band was higher than the relief threshold.

Reliefs For Property Traders And Housebuilders

(LBTT Land and Buildings Transaction Tax – Scotland>Main LBTT Exemptions And Reliefs)

➤ Property traders and housebuilders in Scotland can receive LBTT relief when buying homes from individuals purchasing new homes, stepping in to prevent transaction chain breakdowns, or through part-exchange deals, provided certain conditions are met and maintained.

  1. Property Trader Purchase Relief (LBTT3013): This relief is designed to support property market fluidity by offering LBTT relief to property traders who buy homes from individuals who are purchasing new homes from house building companies. Here’s how it works:
  • Eligibility: The seller must have lived in the home as their main residence at some point in the last two years and is buying a new main residence from a house builder. The property trader must not intend to lease out the property for more than six months, spend over a set amount on refurbishments, or let it to connected persons.
  • Conditions for Relief: The property must be acquired as part of the property trader’s business, specifically targeting scenarios where individuals are moving to new homes built by developers.
  • Tax Implications: If all conditions are met, the property trader is exempt from LBTT on this transaction. However, if conditions are later breached (e.g., excessive spending on refurbishments or improper use), the relief can be withdrawn, and LBTT becomes payable.
  1. Relief Where Property Trader Buys Home to Prevent a Transaction Chain from Breaking Down (LBTT3014): This relief helps maintain transaction chains by allowing property traders to step in and purchase homes when previous sale arrangements fall through, thereby enabling ongoing transactions.
  • Eligibility: The home must have been the seller’s main residence within the last two years, and the seller must be intending to purchase another main residence.
  • Conditions for Relief: The property trader steps in to purchase the old home to allow the seller to proceed with buying another home. The trader should not intend to spend more than the permitted amount on refurbishing the home or lease it for more than six months.
  • Tax Implications: If the trader meets all conditions, they are relieved from LBTT on this purchase. Similar to the first relief, if the trader breaches the conditions after purchase, they must pay the LBTT.
  1. Part Exchange Relief (LBTT3012): This relief facilitates part-exchange deals where a house building company buys an existing home as part or all of the consideration for a new home they sell.
  • Eligibility: The seller must be buying a new home from the house building company and must have lived in their old home as their main residence at some point during the last two years.
  • Conditions for Relief: The home’s garden or grounds must not exceed the ‘permitted area’ unless justified by the home’s size and character. The house building company’s purchase is part of a part-exchange deal where the old home is part of the payment for the new home.
  • Tax Implications: The house building company is relieved from paying LBTT on this transaction, provided all conditions are met. As with other reliefs, if conditions are breached, the relief can be withdrawn, and LBTT becomes due.

 —

Addendum. Buying and Selling Property in Scotland vs. England

(LBTT Land and Buildings Transaction Tax)

Comment: When discussing LBTT, it’s helpful to understand the differences between property sales and purchases in England versus Scotland.

Key Points:

  • Scotland: Sellers handle more upfront costs like the Home Report. Marketing and conveyancing are done by a solicitor estate agent.
  • England: Sellers use estate agents for marketing and hire solicitors later. An Energy Performance Certificate (EPC) is the only required document before listing.
  • Offers: In Scotland, offers are made through solicitors and are legally binding early. In England, offers are made through estate agents and become binding much later.
  • Property Tax: Scotland uses LBTT with different rates from England’s SDLT.

Main Principles:

  • Scotland: Early binding agreements through missives provide stability and reduce the risk of sales falling through.
  • England: Contracts are only binding at the exchange, offering more flexibility but higher risk of transaction failures.

When discussing LBTT it’s helpful to understand the differences between the property sales and purchases in England versus Scotland. 

Selling a Property: Scotland vs. England

  • Scotland:
    • Sellers are responsible for more upfront costs, such as the Home Report, which includes a property survey, an energy efficiency certificate, and a detailed homeowner’s questionnaire.
    • Marketing and conveyancing are typically handled by a solicitor estate agent under one roof, streamlining the process.
  • England:
    • Sellers generally engage an estate agent for marketing and hire a separate solicitor later when an offer is accepted.
    • The only required document prior to listing is an Energy Performance Certificate (EPC).
    • Buyers often conduct their own detailed surveys after making an offer, potentially uncovering issues that could affect the sale.

Marketing a Property: Scotland vs. England

  • Scotland:
    • Properties may be listed with a fixed or ‘offers over’ asking price, potentially selling for significantly more than the listed price.
  • England:
    • Properties are usually marketed with a negotiable asking price, and final sale prices can often be lower than the initial listing price.

Making an Offer on a Property: Scotland vs. England

  • Scotland:
    • Offers must be made through a Scottish solicitor.
    • Buyers can note interest to stay informed about other offers and closing dates.
    • The concept of a closing date for offers is common, allowing sellers to choose from multiple bids.
  • England:
    • Buyers typically make offers directly through an estate agent.
    • ‘Best and final’ offers are used but less formalised compared to Scotland’s process.

Paying Property Tax: Scotland vs. England

  • Scotland:
    • LBTT (Land and Buildings Transaction Tax) replaces SDLT and applies different rates starting at property purchases over £145,000.
    • Additional Dwelling Supplement may apply for second homes.
  • England:
    • SDLT (Stamp Duty Land Tax) applies starting at £125,000, with rates increasing with property value.

Conveyancing Process: Scotland vs. England

  • Scotland:
    • The process involves exchanging formal letters known as ‘missives‘, and the sale becomes legally binding relatively early in the process.
    • Sellers are legally bound once missives are concluded, reducing the likelihood of sales falling through.
  • England:
    • The exchange of contracts occurs much closer to the completion date, with a higher risk of transactions falling apart due to the non-binding nature of agreements until the exchange.

Challenges of Cross-Border Transactions

If you are involved in selling in one country while buying in the other, you may face specific challenges:

  • From Scotland to England: The process is more straightforward once missives are concluded in Scotland, providing a secure basis to proceed in England.
  • From England to Scotland: The later exchange of contracts in England can complicate and delay securing a purchase in Scotland.

Missives vs. Exchange of Contracts

(LBTT Land and Buildings Transaction Tax>Addendum. Buying and Selling Property in Scotland vs. England)

➤ In Scotland, the property sale becomes legally binding early through missives, providing stability and reducing the risk of transactions falling through, while in England, the sale is only legally binding at the exchange of contracts, which occurs closer to completion, allowing for more flexibility but higher risk of deal collapse.

 As previously explained, the process of buying and selling property differs significantly between Scotland and England, particularly in how agreements are formalised and when they become legally binding. Here’s a closer look at these differences:

Scotland: The Missives Process

  • What Are Missives?
    • In Scotland, the process of buying and selling property involves the exchange of formal letters known as ‘missives’.
    • These letters detail the terms of the sale and are exchanged between the buyer’s and seller’s solicitors.
  • Legally Binding Agreement
    • The sale becomes legally binding relatively early in the process. Once all terms are agreed upon and the missives are concluded (i.e., all letters have been exchanged, and agreement on all points is reached), both parties are legally committed to the transaction.
    • This early binding nature tends to reduce the likelihood of the sale falling through, as both parties are committed well before the actual handover.
  • Benefits of Early Binding
    • The early binding of missives minimises the risk of either party backing out, providing a more stable and predictable sales environment.
    • Sellers, in particular, benefit because they have a firm commitment from the buyer, which reduces the financial and emotional strain of potential last-minute cancellations.

England: Exchange of Contracts

  • Timing of Binding Agreement
    • In England, the formal agreement to buy or sell property becomes legally binding at the exchange of contracts, which typically occurs much closer to the completion date (the day when the transaction is finalised, and keys are handed over).
    • The gap between agreeing to terms and the exchange of contracts leaves a larger window during which the agreement is not legally binding.
  • Risk of Transactions Falling Apart
    • Due to the non-binding nature of agreements until contracts are exchanged, there is a higher risk of transactions falling apart in England.
    • Buyers or sellers may opt out of the deal for various reasons, such as changes in the market, personal circumstances, or obtaining a more favourable offer.

Benefits of the Missives Process

  • Stability in the Housing Market
    • The missives process can lead to a more stable housing market as both buyers and sellers have security much earlier in the buying process.
  • Reduction in Wasted Resources
    • Since the agreement is binding early on, fewer resources are wasted on potential sales that fall through. This efficiency benefits everyone involved by reducing the time and effort spent on renegotiating or relisting properties.
  • Emotional and Financial Security
    • Sellers and buyers have greater emotional and financial security, knowing that the deal is less likely to be disrupted once missives are concluded.

Overall, while the missives system in Scotland offers earlier certainty and stability, the process in England allows for more flexibility, which can be both a risk and a benefit, depending on the circumstances of the buyer and seller.

Making an Offer on Property in Scotland vs. England

(LBTT Land and Buildings Transaction Tax>Addendum. Buying and Selling Property in Scotland vs. England)

➤ In Scotland, property offers become legally binding early with a home report and formal solicitor-involved procedures, offering more security, while in England, offers are not legally binding until the exchange of contracts, providing more flexibility but higher uncertainty.

If you’re an overseas investor looking into the Scottish property market, you’ll find that the procedure for making an offer on a property differs significantly from that in England. Both regions have their unique steps and legal implications, which are  helpful to understand for a smooth investment experience.

Making an Offer in Scotland

  • Home Report Requirement: Before a property is listed in Scotland, a comprehensive home report must be provided by the seller. This report includes a survey, an energy report, and a property questionnaire, giving potential buyers detailed insight into the property’s condition and value.
  • Submitting an Offer: In Scotland, if you are interested in a property, you can initially make a verbal offer through the estate agent. This is an informal step that if accepted, leads to the formal offer stage.
  • Formal Offer via Solicitor: All formal offers must be submitted through a Scottish-based solicitor. This offer is legally binding once accepted by the seller, signifying a commitment from both parties.
  • Concluding Missives: The formal acceptance of the offer leads to the ‘concluding of missives’ – the exchange of formal letters (contracts) that make the agreement legally binding. This means the sale is secured relatively early in the process, minimising the risk of the sale falling through.

Making an Offer in England

  • Viewing and Survey: Unlike in Scotland, the buyer typically arranges and pays for property surveys in England. This is done after viewing and deciding to pursue the purchase.
  • Submitting an Offer: Offers in England are also made through the estate agent, but they are not legally binding at this stage.
  • Exchange of Contracts: The legal binding of the sale in England happens at the exchange of contracts, which can occur weeks or even months after the initial offer is accepted. This stage is closer to the completion date (when keys are exchanged and the property officially changes hands).
  • Risk of Transactions Falling Apart: Since the agreement is not legally binding until the exchange of contracts, there is a higher risk of the sale falling through in England. Buyers or sellers may back out due to various reasons, such as changes in the market or personal circumstances.

Practical Implications for Property Investors

Scotland:

  • Security: The early binding nature of property transactions in Scotland provides more security for investors, as the deal is less likely to collapse once missives are concluded.
  • Efficiency: Knowing that the sale is secure early in the process allows for better planning and resource allocation.

England:

  • Flexibility: The later binding stage offers flexibility, allowing buyers to back out if circumstances change or if they find a more suitable property.

Uncertainty: The risk of deals falling through can lead to uncertainties in investment plans and potential financial losses.

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This Article Written By Nick Garner
Founder Stamp Duty Advice Bureau
Author of Stamp Duty Land Tax Guide
For Property Investors.