Schedule 19 – Leases
270.This schedule, introduced by section 52, provides for the tax treatment of leases under this Act. Section 52 also contains a regulation making power to allow the Scottish Ministers to amend schedule 19. Part 2 of schedule 19 provides for the amount of tax chargeable on rent. Part 3 provides for the amount of tax chargeable in respect of consideration other than rent. Part 4 provides for review of the tax chargeable. Part 5 provides for the chargeable consideration in relation to rent and consideration other than rent and Part 6 covers other provisions about leases. For leases held by partnerships, schedule 19 is modified by Part 6 of schedule 17.
Part 1 - Introductory
271.Paragraph 2 provides that where the chargeable consideration for a chargeable transaction consists of both a rental element and other consideration (e.g. a premium) then the tax due on the two elements of the consideration should be calculated separately and added together to determine the total tax to be paid.
Part 2 – Amount of Tax Chargeable: Rent
272.The schedule does not set out the bands and rates for the chargeable consideration which consists of rent. As set out in paragraph 3, these must be specified by the Scottish Ministers by order. Ministers must specify a nil rate band and at least one other tax band. To ensure the tax is a progressive one, the percentage rate tax band for each tax band must be higher than for the band below it. The first order made under this paragraph will be subject to the affirmative procedure, whilst all subsequent orders will be subject to the provisional affirmative procedure (see section 68). Paragraph 4 sets out how the tax on the rental element of the chargeable consideration should be determined. Paragraph 5 makes specific provision for the same calculation in relation to linked transactions. Paragraph 6 sets out the formula for calculating the net present value (“NPV”) of the rent payable over the term of a lease. That formula is used in the calculations under paragraphs 4 and 5. Paragraph 7 provides that the “temporal discount rate”, which forms part of the NPV formula set out in paragraph 6, is 3.5 per cent and empowers the Scottish Ministers to vary this rate by order. This order will be subject to the affirmative procedure (see section 68).
Part 3 – Amount of Tax Chargeable: Consideration Other Than Rent
273.Paragraphs 8 and 9 set out the rules for calculating the tax chargeable for consideration other than rent e.g. where a premium is paid for the lease. Essentially, the provisions of the Act on chargeable consideration generally apply for the purposes of calculating the tax due on consideration other than rent. Paragraph 9(2) provides that the nil rate tax band does not apply in relation to the consideration other than rent where the relevant rental is at least £1,000. Paragraph 9(3) provides for the conditions that must pertain for sub-paragraphs (4) and (5) to apply. Sub-paragraph (4) provides for the determination of the tax chargeable in respect of transactions that are linked and sub-paragraph (5) provides that the apportionment of the chargeable consideration between the linked transactions should be carried out on a just and reasonable basis. Sub-paragraphs (6) and (8) define the terms “the relevant rent”, and “relevant land” respectively for this paragraph and sub-paragraph (7) defines “annual rent” for the purposes of sub-paragraph (6).
Part 4 – Review of Tax Chargeable
274.Paragraph 10 makes provision for a system of reviews of the tax chargeable to ensure that the correct amount of tax is paid in relation to the lease, taking account of any variations in rent or other terms made during the course of the lease. In most cases, the tax chargeable will be reviewed on every third anniversary of the effective date of the lease.
275.Sub-paragraph (1) provides that paragraph 10 applies where a buyer (i.e. the tenant) has made a land transaction return (in terms of section 29(1)) or where a return has been made under section 31 (return where contingency ceases or consideration ascertained) or under various paragraphs of this schedule, namely: paragraph 20 (return where lease for fixed term continues after end of term), paragraph 22 (return in relation to lease for an indefinite term) or paragraph 30 (return where transaction becomes notifiable on variation of rent or term).
276.Sub-paragraph (2) requires the buyer to make a return to the Tax Authority on the review date, unless the lease has been assigned or terminated. (Wherever returns are required under schedule 19, any tax or additional tax payable must be paid at the same time the return is made – see section 40(2)(e)).
277.Sub-paragraphs (3) and (4) require the buyer to assess the amount of tax that is chargeable at the review date and submit a return within 30 days, beginning with the day after the review date. Sub-paragraph (5) clarifies that the tax rates and bands to be applied at the review of the tax chargeable are to be those that were in force at the effective date of the transaction.
278.Sub-paragraph (6) provides that where at a review date it is calculated that less tax is now due in relation to the lease, the overpaid tax is to be repaid by the Tax Authority. Sub-paragraph (7) defines what the “review date” is in the case of each of the returns referred to in sub-paragraph (1).
279.Separate from the provisions of paragraph 10, paragraph 11 makes provision for the buyer to submit a return where the lease is assigned or terminated. Sub-paragraphs (2), (3) and (4) provide that the buyer must calculate the tax chargeable and make a further return to the Tax Authority within 30 days, beginning with the day after the relevant day (which is the day the lease is assigned or terminated). Sub-paragraph (5) clarifies that the tax rates and bands to be applied at the review of the tax chargeable are to be those that were in force at the effective date of the transaction.
280.Sub-paragraph (6) provides that where a lease is assigned or terminated and it is calculated that less tax is now due in relation to the lease, the overpaid tax is to be repaid by the Tax Authority. If it is calculated that less tax payable is at the date of the assignation or termination because of changes that have been made to the lease since the last return was made, then a claim for overpayment of tax should be submitted to the Tax Authority. Such overpayments may arise, for example, because since the last return was submitted, the lease has been varied to reduce the spatial area of the premises subject to the lease and the rent has been reduced accordingly.
Part 5 – Chargeable Consideration: Rent and Consideration Other Than Rent
281.Part 5 makes provision about what counts, or does not count as chargeable consideration when calculating the tax chargeable for a lease. Paragraph 12 makes provision about certain aspects of rent generally, although “rent” is not as such defined.
282.Paragraph 13 sets out the rules for determining the rent payable under a lease where the rent varies in accordance with provisions in the lease or where a rent is contingent, uncertain or unascertained. This will be necessary for the purposes of calculating the tax due on the rent under, for example, paragraphs 4, 5, 10 and 11. The effect of sub-paragraph (5) is limited to just paragraph 13 (variable or uncertain rent) itself.
283.Paragraph 14 provides that, in the case of the grant, assignation or renunciation of a lease, a reverse premium does not count as chargeable consideration. Sub-paragraph (2) defines what a “reverse premium” means.
284.Paragraph 15 sets out a list of tenants’ obligations (for example, any undertaking by the tenant to repair, maintain or insure the leased premises) which in the case of the grant of a lease do not count as part of the chargeable consideration.
285.Paragraph 16 clarifies that where there is an assignation of a lease, then the assumption of the responsibilities by the assignee (the person to whom the lease is assigned) to pay rent or any other obligation of the tenant under the lease do not count as chargeable consideration for the assignation.
286.Paragraph 17(1) provides that where a tenant, or any person connected with or acting on behalf of the tenant, makes a loan or pays a deposit (whether to the landlord or to a third party), the repayment of which is contingent on anything to be done or not to be done by the tenant or on the death of the tenant, then the amount of the loan or the deposit is to be treated as consideration other than rent paid by the tenant for the grant of the lease. Sub-paragraph (2) makes similar provision to sub-paragraph (1) in relation to arrangements in connection with the assignation of a lease. Sub-paragraph (3) provides that sub-paragraphs (1) and (2) do not apply where the deposit does not exceed twice the relevant maximum rent. Sub-paragraph (4) defines the relevant maximum rent in relation to the grant of a lease as the highest amount of rent payable in respect of any consecutive 12 month period during the term of the lease - and in relation to the assignation of a lease, it is the highest amount of rent payable in respect of any consecutive 12 month period during the term of the lease remaining outstanding at the date of the assignation. Sub-paragraph (5) makes further provision for determining the highest amount of rent for the purposes of sub-paragraph (4). Sub-paragraph (6) provides that tax is not chargeable under this paragraph if it would be chargeable only because of the effect of paragraph 9(2). Paragraph 9(2) excludes the nil rate tax band where the relevant rent attributable to non-residential property is less than £1,000 per year.
287.Paragraph 18 makes provision for the renunciation of an existing lease in return for a new lease between the same parties In such cases, the grant of the new lease does not count as chargeable consideration for the renunciation and the renunciation does count as chargeable consideration for the grant of the new lease. Sub-paragraph (2) provides that paragraph 5 (exchanges) of schedule 2 (chargeable consideration) does not apply in such a case.
Part 6 – Other Provisions about Leases
288.Part 6 makes provision for dealing with a number of different and specific circumstances relating to leases that are not covered elsewhere in the schedule.
289.Paragraph 19 defines a lease for a fixed term.
Leases that continue after a fixed term
290.Paragraph 20 applies to leases that continue after a fixed term either by agreement between the parties or by operation of law (such as the Scots law principle of tacit relocation). Under sub-paragraph (2), such a lease is treated as if it were a lease for the original fixed term and no longer. If it continues after the end of the term, it is treated as if it were a lease for 1 year longer. As it continues, each year a further year is added to the term of the lease.
291.Sub-paragraph (3) provides that where a lease transaction that was not previously notifiable to the Tax Authority becomes notifiable because of the continuation of the lease beyond its fixed term, a return will be required. The return must be made within 30 days of the day at the end of the 1 year period as a result of which it became notifiable. Sub-paragraph (3)(c) clarifies that the tax rates and bands to be applied in calculating the tax chargeable are those that were in force at the effective date of the transaction.
292.Where a lease continues beyond its fixed term and paragraph 20 would apply but during the 1 year period beyond the fixed term a new lease is granted to the tenant for the same (or substantially the same) premises, then paragraph 21 disapplies the provisions of paragraph 20. The new lease is treated as beginning immediately after the end of the fixed term of the original lease. Sub-paragraph (4) of paragraph 21 provides that any rent which was payable under the original lease after the end of the fixed term is treated as payable under the new lease. Sub-paragraph (5) provides that if the original lease has been extended more than once under the provisions of paragraph 20, then paragraph 21 disapplies paragraph 20 from the end of the last 1 year period when the lease was extended.
Leases granted for an indefinite term
293.Paragraph 22 makes provision for leases which are granted for an indefinite term, in particular for the determination of how long the lease lasts. This may trigger notification of the lease, and may result in tax being chargeable, if the lease continues. Specifically, sub-paragraph (2)(a) provides that a return will be required when a lease becomes notifiable when it was not previously notifiable. In accordance with sub-paragraph (2)(a), the buyer must submit a return within 30 days of the end of the 1 year period at which the transaction became notifiable. Sub-paragraph (2)(c) clarifies that the tax rates and bands to be applied at the review of the tax chargeable are to be those that were in force at the effective date of the transaction.
Successive linked leases
294.Paragraph 23 is an anti-avoidance provision which treats successive leases of the same premises between the same parties (or are otherwise linked transactions) as one lease for the purposes of the Act. The successive linked leases are treated as being granted at the time of the grant of the first lease in the series, for a term equal to the aggregate of the terms of all the leases and in consideration of the rent payable under all the leases.
Rent for overlap period in case of grant of further lease
295.Paragraph 24 treats rent paid during an “overlap period” between the end of one lease and the grant of another as, in certain circumstances, paid under the old lease and not the new lease. Sub-paragraph (1) sets out the three circumstances where this will apply.
Agreement for lease substantially performed etc.
296.Paragraph 25 deals with the situation where parties enter into an agreement (referred to as a “notional lease”) under which a lease is to be executed and the agreement is substantially performed without a lease having been executed. In such cases, the agreement is treated as if it were the grant of a lease that started on the date it was substantially performed in accordance with the agreement between the parties. Sub-paragraph (2) clarifies that the effective date of the transaction is the date when the agreement was substantially performed.
297.Sub-paragraph (3) provides that if at a later time a lease is formally executed (referred to as the ‘actual lease’), then the Act applies as if the notional lease was granted on the date it was substantially performed, for a term that begins and ends in accordance with the dates set out in the actual lease and in consideration for the total rent payable over that term and any other consideration given for the agreement of the actual lease. Sub-paragraph (4) provides that where sub-paragraph (3) applies, the grant of the actual lease is disregarded unless it is treated as a later linked transaction under section 34 of the Act.
298.Sub-paragraph (5) sets out how paragraph 25 of schedule 19 works with section 34 of the Act. Sub-paragraph (5)(a) links the grant of the notional lease and the grant of the actual lease, regardless of whether the provisions of section 57 would have linked them in any case. Sub-paragraph (5)(b) provides that the tenant under the actual lease is liable for any tax or additional tax due in relation to the notional lease where sub-paragraph (3) applies. Sub-paragraph (5)(c) clarifies that in section 34(2) the reference to the buyer in the earlier transaction is to be read in relation to the notional lease as a reference to the tenant under the actual lease.
299.Sub-paragraphs (6) and (7) allow the tenant to amend their tax return to claim for a repayment of tax by the Tax Authority where an agreement under sub-paragraph (1) is annulled or not carried into effect.
Missives of let followed by execution of formal lease
300.Paragraph 26 makes similar provision to that of paragraph 25 but covers the circumstances where a lease is agreed by concluded missives of let (referred to as the ‘first lease’), and the execution of a formal lease (the ‘second lease’) takes place at a later date. In accordance with sub-paragraph (1), the missives of let are treated as a lease granted on the date the missives of let were concluded, for a term which begins with that date but ends at the end of the term of the second lease and in consideration of the total rent payable over that term, plus any other consideration given for the first or the second lease.
301.Sub-paragraph (2) disregards the second lease for the purposes of the Act except for section 34 (which requires a tax return where there is a second transaction that is linked to the first transaction and makes the first transaction notifiable).
302.Sub-paragraph (3) applies the provisions of sections 63 and 64 to decide the effective dates of the first lease and the second lease.
303.Sub-paragraph (4) sets out how paragraph 26 of schedule 19 works with section 34 of the Act. Sub-paragraph (4)(a) links the grant of the first lease and the grant of the second lease, regardless of whether the provisions of section 57 would have linked them in any case. Sub-paragraph (4)(b) provides that the tenant under the second lease is liable for any tax or additional tax due in relation to the first lease where sub-paragraph (1) applies. Sub-paragraph (4)(c) clarifies that in section 34(2) the reference to the ‘buyer in the earlier transaction’ is to be read in relation to the first lease as a reference to the tenant under the second lease.
Cases where assignation of lease treated as grant of a lease
304.Paragraph 27(1) applies the provisions of that paragraph where one of the following tax reliefs were claimed for the grant of a lease: sale and leaseback relief, relief for alternative finance investment bonds, group relief, charities relief and public bodies relief (as set out in sub-paragraph (3)).
305.Sub-paragraph (2) provides that where the lease is assigned to a different tenant and none of those tax reliefs would apply, then the lease is subject to LBTT and is considered to be the grant of a lease by the assignor for the remaining term of the lease and on the terms agreed to by the assignee.
306.Sub-paragraph (4) disapplies paragraph 27 where group relief, reconstruction relief, acquisition relief or charities relief has been withdrawn prior to the effective date of the assignation. Sub-paragraph (5) refers to the relevant provisions in the Act in relation to the withdrawal of each of those reliefs.
Assignation of lease: responsibility of assignee for returns etc.
307.Paragraph 28 makes clear that where a lease is assigned, then after the effective date of the assignation, the assignee assumes the assignor’s duties in relation to LBTT. Sub-paragraph (2) sets out the relevant provisions of the Act which apply to the assignee. These include the requirement to submit a tax return on every third anniversary of the effective date, in accordance with paragraph 10 of schedule 19. Sub-paragraph (3) requires that anything that was done by the assignor is to be treated as if it was done by the assignee. Sub-paragraph (4) disapplies paragraph 28 in the event that paragraph 27 applies.
Reduction of rent or term or other variation of lease
308.Variations are not, generally, treated under Scots law as creating new leases. However paragraph 29 specifies three variations of leases which are treated for the purposes of the tax as acquisitions of chargeable interests.
Increase of rent or term: notification
309.Paragraph 30 applies where a lease is varied so as to extend its term or increase the rent payable, the effect of which is that the transaction becomes notifiable to the Tax Authority when it was not previously notifiable. In accordance with sub-paragraph (2), the buyer must submit a tax return within 30 days of the ‘relevant date’ which sub-paragraph (3) specifies, is the date from which the variation takes effect. Sub-paragraph (2)(c) clarifies that the tax rates and bands to be applied in calculating the tax chargeable are those that were in force at the effective date of the transaction.
