Scottish government proposes subsale LBTT relief for certain "significant" developments

Property expert Alan Cook of Pinsent Masons, the law firm behind Out-Law.com, said that the proposal would tentatively be welcomed by the property sector, as it had been concerned about the apparent non-availability of subsale relief under the new tax framework, which is due to replace stamp duty land tax (SDLT) in Scotland from 2015. However, he said that there would be questions over how valuable the proposed relief would be in practice, given  that LBTT needs to be paid  up front by the first buyer and can only be reclaimed if the final purchaser under the subsale completes significant development of the land within 5 years.

"The proposed relief applies to more than just 'forward fund' transactions, and extends to a broader range of development situations which involve a subsale," he said. "This will be welcomed by the property sector, which had been very concerned that the non-availability of subsale relief except in very limited circumstances would render Scotland a less attractive place for developers to do business."

"However, there are still a number of issues which will need to be considered under these proposals. For example, the full amount of tax does still need to be paid up front, and is then available for refund if significant development of the land completes within five years - there is clearly a cashflow issue here for developers. In addition, the seller under the subsale will be the party claiming the relief, but to be able to reclaim a refund of LBTT under the exemption it will then be reliant on the onward buyer under the subsale completing significant development within five years. Parties will be looking at where risk ought to lie and will look to frame contractual arrangements which accommodate this," he said.

LBTT will replace SDLT in Scotland from 1 April 2015, and will apply when land or buildings are purchased or leased. The Scottish government has proposed a progressive structure, similar to the current income tax system, under which slices of the transaction price will be subject to LBTT at increasing percentages. The current SDLT system features a 'slab' system of taxation, where the amount of the consideration determines a single rate of tax which is applied to the whole amount.

Currently, subsale relief prevents a double SDLT charge when someone contracts to buy property and then sells the property on before they have acquired it from the original seller, so that the property is transferred directly from the original seller to the third-party buyer. Subsales are commonly used in property investment and development transactions. However, the legislation which would give effect to LBTT contains no provisions for subsale relief at all.

In its consultation, which runs until 29 August 2014, the Scottish government proposes that "significant" developments or redevelopments of land where that development or redevelopment completes within five years of the effective date of the subsale be entitled to subsale relief. By "significant", the proposal refers to developments which require planning permission. The first buyer would still have to pay the tax up front, but could then apply for it to be refunded if a completion certificate is issued for the development within five years of the subsale.

"In practice, it may be very difficult for the seller under the subsale to influence whether the onward purchaser completes a significant development of the land within five years, as they will typically refuse to make any commitments to sellers or other third parties that they will develop at all, never mind within a defined period," property expert Alan Cook said.

"There is therefore still a question mark over how valuable this proposed relief will be in practice," he said.