It is almost one year since we welcomed Scotland’s first fully devolved Land and Building Transaction Tax (LBTT) as a replacement to Stamp Duty Land Tax (SDLT). Residential home owners were all too aware of the impact on their property purchases last April 2015 and second home owners or buy-to-let purchasers are mindful of the upcoming 3% supplement on their full purchase price which comes into effect on 1 April 2016.
But what about commercial property owners and occupiers? We consider the longer term impact on the commercial rental market and explore if and where your approach to buying, leasing and paying your dues may need to be adapted.
Q: I am purchasing a commercial property. How does LBBT apply to my purchase?
LBTT is a progressive tax. Under SDLT a banding system operated and the rate of tax applied to the entire amount and was based on the total value of the sale.
For example, Mr Pagan purchased a commercial property in Cupar for £250,000.00 pre-April 2015. He incurred an SDLT charge at 1%. If he had purchased that same property for £250,000.01 he would have incurred a higher tax charge of 3% (despite the mere one penny difference!)
Mr Osborne purchased a commercial property in Cupar for £250,000.00 post-April 2015. LBTT is not applied to commercial purchases up to £150,000.00 but charged at 3% on any amount between £150,000.01 to £350,000.00 - or at 4.5% on any amount greater than £350,000.01.
In this example, Mr Osborne would incur a higher LBTT rate than Mr Pagan under SDLT. However, commercial properties purchased at a price between £500,000.00 and £1.5 million LBTT offer a greater saving.
For example, a further investment by Mr Pagan of a commercial property in St Andrews post-April 2015 at £750,000 would demand £24,000 in LBTT compared to an SDLT charge of £30,000.
Q: I am a tenant of a commercial property. What SMALL PRINT do I need to be aware of?
Those of you who are familiar with SDLT rates should take note. LBTT will not only be payable under a new commercial lease, but the rates you pay will be revisited by Revenue Scotland on a three yearly cycle.
The way tax is calculated on commercial leases remains the same as with SDLT (ie. 1% of the Net Present Value (NPV) of the sum total of rental payments throughout the duration of the lease).
For example, if Mr Pagan were to rent his commercial property to Little PO, LBTT would be charged at 1% on the NPV of the lease over £150,000. Most importantly (take note Little PO) if the lease were to be assigned to a new tenant, the terms of the leased altered, or the lease itself terminated by either party then there would also be an obligation on the tenant to submit a further LBTT return, potentially incurring a further tax bill.
Significantly, you as a tenant must submit a new tax return every third anniversary of the lease. Failure to do so or to make payment will lead to financial penalties and additional interest on any tax due.
Ian Fraser is a partner in our Commercial and Business Services team. To discuss the impact of LBTT on your commercial property – whether you are a potential purchaser, existing owner, or current tenant - email Ian or call 0131 624 6967.