Out-Law Guide 3 min. read

LBTT: completing the three-yearly lease return

Commercial tenants holding leases entered into since land and building transaction tax (LBTT) was introduced in Scotland are subject to additional obligations to submit regular returns to Revenue Scotland to ensure that they pay tax in line with the actual rent paid.

Returns must generally be submitted on the third anniversary of the lease, then every three years thereafter throughout the life of the lease.They are also due if the lease is assifned and when it comes to an end.

Who must submit a return?

LBTT is payable on the net present value (NPV) of the rent payable under a non-residential lease. Under the previous stamp duty land tax (SDLT) regime, NPV was calculated based on the rent for the first five years of the lease, so rent increases after that time had no effect on the tax paid. Under the LBTT regime, NPV is based on actual rent paid. This means that the tenant must pay additional duty as a result of rent increases, but equally may be able to reclaim extra tax paid subject to time limits.

Review returns are required for:

  • 'notifiable' LBTT leases subject to an LBTT return - i.e. leases with an effective date on or after 1 April 2015, or which have been substantially performed before 1 April 2015 but completed after that date; and
  • 'transitional' leases, for example variations to SDLT leases which are treated as new leases under the LBTT (Transitional Provisions) (Scotland) Order 2014.

They are not required for:

  • leases which have never been subject to a LBTT return, for example leases which were and continue to be SDLT leases granted on or after 1 December 2003 and before April 2015, or stamp duty leases entered into before 1 December 2003;
  • LBTT leases which have been subject to an LBTT return but were exempt by virtue of 100% relief from LBTT claimed on the first LBTT return lodged and that full relief continues to apply.

Where a return is required, it must be submitted regardless of whether there have been any changes to the lease or any additional tax needs to be paid.

When is the return due?

A return must be submitted on each LBTT review date. This is usually the third anniversary of the effective date of the lease and then every subsequent third anniversary of that date, and at the expiry of the lease term.

Where the first LBTT return has been made for a lease that became notifiable as a result of an extension to the term or an increase in the rent, the review date is the third anniversary of the date of the variation that made the lease notifiable, and on each subsequent third anniversary of that date.

As part of the return, you as the tenant must recalculate your LBTT liability using actual or the most up-to-date figures. If your initial estimates were too low, a further return must be submitted and any extra LBTT must be paid within five working days of submission of the return. If your initial estimates were too high, the extra tax paid can be reclaimed, subject to time limits. Revenue Scotland has produced guidance on how to calculate tax on a lease review.

Subsequent events may require additional returns or additional LBTT to be paid. These include lease renewals; termination or lease expiry; or assignation or subsequent transactions.

How long must I retain records?

You are required to retain all relevant records relating to the return for a period of at least five years from the day on which the return is made or, if the return is amended within the 12 month period allowed, five years after the amendment is notified.

Examples of documents and records which might need to be retained include:

  • the contracts for the original lease transaction and any related side papers;
  • any professional valuations that have been obtained, or other details of how any estimates were arrived at;
  • relevant instruments relating to the transaction, in particular any lease, and any supporting maps, plans or similar documents such as assignations, lease variations and rent review memoranda;
  • partnership agreements;
  • completion documents;
  • records of relevant payments, receipts and financial arrangements;
  • a copy of all land transaction returns; and
  • details of how any LBTT was calculated for each return.

If Revenue Scotland gives notice of its intention to carry out an inquiry, all relevant records must be kept until the inquiry is completed. Penalties may be charged for any failure to keep records. There is a period of three years from the date of filing during which Revenue Scotland can open an inquiry.

Where can I find more information?

Revenue Scotland has produced guidance for completion of the lease review LBTT return, which provides more information about the basis on which the return is completed and submitted. It has also produced some worked examples.

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