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Land And Buildings Transaction Tax - Sub-Sale Transactions

Land And Buildings Transaction Tax - Sub-Sale Transactions

You may have read our previous blog on Land and Buildings Transaction Tax (“LBTT”) which comes into force on 1 April 2015. In that blog, I had commented that the LBTT regime, at the time of writing, did not offer a form of sub-sale relief as is available under Stamp Duty Land Tax (“SDLT”).

Why is sub-sale relief important?

Sub-sale relief is important in a number of commercial transactions. These include forward funding transactions, as well as arrangements whereby a sale of part of a site is used to fund a purchase of the principal part of the site. Sub-sale relief keeps tax costs down in respect of such transactions, making them more viable and attractive to developers, in an already challenging market.

What has happened since our last blog on LBTT?

Many within the property industry had raised concerns about the lack of sub-sale relief under LBTT. Such industry pressures have led to the Scottish Government making a proposal to offer a targeted sub-sale relief under LBTT. This proposal has been put forward for consultation by the Scottish Government.

What is the proposed relief?

The proposed relief is to apply to sub-sales where a “significant” development has been completed on the property within 5 years of the sub-sale. This contrasts with sub-sale relief under SDLT which is much wider, as it does not require any sort of development. Therefore, even with the introduction of this relief, there are many categories of transactions in which sub-sale relief is currently available under the SDLT regime but which will not benefit from a similar relief under the LBTT regime.

What is “significant” development?

A “significant” development is one which requires an application for planning permission. An application for planning permission on its own is not sufficient to qualify. There will need to be actual development.

Development for the purposes of the proposed relief means the building of residential, retail, office or industrial buildings. The definition of development is also sufficiently broad to capture the redevelopment of such buildings, to the extent that there has been material and structural alteration of the buildings.

On the face of it, it appears that the definition of development does not seem to be sufficiently wide so as to include property which is used for leisure purposes. There is also a specific bar on sub-sale relief against agricultural developments. These examples would not fall within the scope of the proposed relief.

When is a development considered as completed?

The consultation paper from the Scottish Government suggests that the issuing of a Completion Certificate would provide sufficient evidence of completion for the purposes of the relief.

The proposed relief also enables the taxpayer to claim one interim and partial refund to the extent that a part (or parts) of the development are complete and can be evidenced by a Completion Certificate. However, this offers little comfort where a development is partially (or even substantially) complete but not so as to merit a Completion Certificate.

Relief or refund?

The proposed relief is only available retrospectively. This means that the taxpayer must pay the LBTT up front and then subsequently claim back the relief upon completion of the development, which may raise cash-flow issues. Cash-flow is undoubtedly a major driving factor as to why many go down the sub-sale route and a requirement for a retrospective claim-back of LBTT may dilute the effectiveness of the relief.

The taxpayer is also relying upon the completion of the development actually happening within a 5 year period, which is something they may have no control over. There may be subsequent transfers of part which gives the taxpayer even less control over completion of the development.

The availability of an interim and partial refund alleviates such concerns to an extent. However, there is only an entitlement to one partial refund over the course of the five year period.

Under the current proposals, it appears that parties will have to agree as to how to apportion the liability and risk in respect of sub-sale relief. How this would be agreed between parties in practice remains to be seen.

A penny for your thoughts

We will be submitting a response to the Scottish Government’s consultation and this is to be submitted by 29 August 2014. We would be keen to hear your concerns and views on the Scottish Government’s proposals. If you want to make your views heard directly then you should click here.

Stuart Gardiner