Devolved Taxes: the case of Land and Buildings Transaction Tax (LBTT) group relief and share pledges
It is to be expected that issues may arise around the implementation of devolved taxes. One such issue is an area that pertains to Land and Buildings Transaction Tax (LBTT) group relief. The Land and Buildings Transaction Tax (Group Relief Amendment) (Scotland) Regulations 2018, laid on 17 May 2018 and which Parliament has to approve, aim to remedy this. But will they?
Land and Buildings Transaction Tax (LBTT)
Stamp Duty Land Tax (SDLT) was one of two taxes devolved to Scotland on 1 April 2015 (alongside Landfill Tax) and was replaced by LBTT under the Land and Buildings Transaction Tax (Scotland) Act 2013 (“the LBTT Act”). LBTT applies to residential and commercial land and buildings transactions where a chargeable interest is acquired. It is administered by Revenue Scotland with support from Registers of Scotland.
What is group relief?
There are a number of LBTT reliefs, including ‘group relief’, which is provided for under Schedule 10 of the LBTT Act. Group relief is available where, at the effective date of the transaction, the seller and buyer are both companies in the same group. An estimated 370 transactions claimed Group Relief in 2017-18, to the value of £49.1 million.
Group relief is also available under SDLT in the rest of the UK. However, there is a particular type of transaction for which group relief can be claimed under SDLT, but not currently under LBTT.
Group relief and share pledges
Under SDLT, group relief can be claimed where there is a transaction within a group and security has been granted to a lender over shares in the relevant group company, or there is an equivalent arrangement in place, i.e. shares are used as collateral against a loan. Under LBTT legislation however, relief cannot be claimed for transactions involving these kinds of arrangements.
This may seem straightforward. But it only became clear however when Revenue Scotland issued an Opinion on the matter in summer 2017 and thereafter published its approach in LBTT Technical Bulletin 3 in December 2017. This explains that Sch.10 of the LBTT Act restricts group relief where at the effective date of the transaction, there are arrangements in place which mean that a person ‘has or could obtain control of the buyer but not of the seller.’ Revenue Scotland believes this is the case where there is a relevant share pledge in place.
Is this divergence between LBTT and SDLT a problem? Not necessarily. Indeed, the whole purpose of devolution is to allow for policy divergence. However, until last summer, it was not all that clear to tax representatives that group relief was not available in relation to intra-group transactions where there is a share pledge, or similar arrangements, in place. This took account of the Scottish Government’s policy intention, when the Scottish Parliament considered and scrutinised the LBTT (Scotland) Bill, for group relief to operate in a similar way to the relief for SDLT.
Changing the law
Concern was raised by stakeholders about the inconsistency between SDLT and LBTT. In response, the Scottish Government proposed a draft Scottish Statutory Instrument to amend the LBTT Act and make group relief available in respect of these types of transactions. Stakeholders raised a number of concerns over the draft instrument – in fact, of the 10 consultation responses published by Government, eight disagreed that the draft instrument would achieve an outcome consistent with the equivalent group relief arrangements available under SDLT. Issues included the fact ‘pledges’ were not explicitly covered (just arrangements ‘analogous to a pledge’), the use of the term ‘mortgage’ (not generally used in Scots law) and whether foreign arrangements were covered.
The Land and Buildings Transaction Tax (Group Relief Amendment) (Scotland) Regulations 2018 appears to address all of these issues. Except one, which it cannot: if approved by Parliament, the regulations will apply only in relation to transactions with an effective date on or after 30 June 2018. In other words, it won’t apply to those transactions that occurred between 1 April 2015 and 30 June 2018. The Government has stated it will explore whether retrospective primary legislation would be a possible option.
Why do we need primary legislation for this kind of technical change? Because there is no express provision in the primary legislation for secondary legislation to apply retrospectively.
This is the second time this happens. The first time concerned the Additional Dwelling Supplement (ADS), an LBTT surcharge on the purchase of additional homes. ADS relief, subject to certain rules, is available for the purchase of additional homes that are intended to replace the main residence.
The Land and Buildings Transaction Tax (Amendment) (Scotland) Act 2016 which introduced ADS on 1 April 2016 treats married couples, those in a civil partnership and cohabitants as a ‘single economic unit’. Initially however, couples who jointly bought a home to replace a home owned by only one of them were unable to claim ADS relief. This was resolved by amendments in the Land and Buildings Transaction Tax (Additional Amount-Second Homes Main Residence Relief) (Scotland) Order 2017 which extended ADS relief to couples in the above situation. The Order covers transactions where the contract to purchase a new main residence was entered on or after 20 May 2017, and the effective date of the transaction was on or after 30 June 2017. This left couples who bought their house before this date unable to claim relief.
To remedy this, the Government had to introduce a whole new bill, the Land and Buildings Transaction Tax (Relief from Additional Amount) (Scotland) Bill (which passed Stage 3 on 17 May 2018). See the SPICe briefing on this for more details.
The case of ADS relief for couples, and group relief where companies have share pledges in place, demonstrates that unforeseen issues do arise around tax devolution. It raises broader issues about tax certainty and efficiency – two of the four principles of the Scottish Government‘s approach to taxation.
The Law Society for Scotland has proposed that Revenue Scotland and the Scottish Government set up a Policy Partnership in relation to the devolved taxes so that they can work more closely together to identify and remedy these types of issues. It and the Chartered Institute of Taxation also think an annual Scottish Finance or Tax Bill, similar to the UK Government’s Finance Bill, may help provide clarity to taxpayers and their advisers, and perhaps even allow for greater parliamentary scrutiny of tax changes.
MSPs from different parties agree an annual Finance Bill would help, by embodying key tax policies as well as making technical adjustments. In response to these calls, Cabinet Secretary for Finance and Constitution Derek Mackay said yesterday: “The prospect of an annual finance bill is worthy of further exploration.” It remains to be seen whether this will be done in time for any conclusions to be presented by the end of the current Parliament, as recommended by the Budget Process Review Group.
Anouk Berthier, Senior Analyst, Financial Scrutiny Unit