The land and buildings transaction tax is the Scottish equivalent of Stamp Duty, and it works in much the same way. Anyone who is purchasing a property in Scotland needs to submit an LBTT return to Revenue Scotland. Failing to do so or submitting a form incorrectly can lead to financial penalties and potential interest payments. These can quickly get expensive, so it is important to remember to account for the LBTT when you are buying property.
Like the Stamp Duty tax in the rest of the UK, the Lands and Buildings Transaction Tax is confusing for many first-time buyers. The issue is further complicated by the introduction of temporary changes to the system in response to Covid-19. This response has included changing the limit at which LBTT must be paid.
Below is everything you need to know about how land and buildings transaction tax works before you commit to the purchase of residential or commercial property in Scotland.
When Does Land And Buildings Transaction Tax Have To Be Paid?
The LBTT must be paid on the purchase of any property in Scotland that costs £250,000 or more, or £40,000 if it is a second home. Even if the property you purchase is exempt from LBTT, you are still required to submit a declaration form. In most cases, your solicitor or legal representative will handle payment of the LBTT on your behalf. Having a professional handle the matter is the best way of ensuring that it is submitted on time and in the right form.
There are some circumstances, other than those where the property falls outside of the specified price range, where a property may be exempt from LBTT, or liability reduced. For example, where a property only just falls within the higher band for the tax, it might be worth asking the seller if they would be willing to accept a slightly lower price so you can avoid the higher liability.
If the ownership of a property is being transferred between spouses or partners who are separating, pursuant to a previous court order, there is no need to pay LBTT on the transaction. However, if the joint owners of a property are not married or in a civil partnership, then they may be required to pay LBTT when transferring the ownership of property between them.
Transactions are also exempt from LBTT when the property is being transferred according to the terms of a will. In these cases, you don’t even need to submit any paperwork to Revenue Scotland, and there isn’t any tax to pay. This includes all properties that have an outstanding mortgage on them.
If a property is given to you as a gift, you won’t usually have to pay any LBTT on it. However, you will have to pay the tax if there is an outstanding mortgage on the property.
One circumstance in which there is no LBTT to be paid is what is known as a ‘chain-breaking purchase’. Let’s say that you are getting ready to sell your primary home and move into a new property. You have a buyer lined up to take your main home off you, meaning you don’t have to pay the higher second home rate of LBTT. However, the transaction with the buyer falls through, and you are left stuck with the property that you want to move out of.
In this scenario, a property trader can step in and purchase the home that you want to sell without having to pay any LBTT on the purchase. There are some other conditions that need to be met in order for this to apply. For example, the property must have been the seller’s main residence during the previous two years, and the purchase must be so that the seller can proceed with the purchase of a new home.
Right To Buy
Throughout most of the UK, Stam Duty relief is available when a property is being purchased through a right to buy scheme. However, this same relief isn’t available for Scottish buyers; there is no LBTT relief for right to buy transactions, unfortunately.
You can receive a reduction in the rate of LBTT that you pay when you purchase multiple properties simultaneously. For example, if you were to purchase five houses all in one go, then your tax relief will be calculated by taking the total amount paid and dividing it by the number of dwellings being purchased in the transaction.
If you were to spend £1 million to purchase five properties, then your tax liability would be equal to one million divided by five, which is £200,000. That means you would pay LBTT as if you had paid £200,000 for each property. Under the current system, that would mean no LBTT at all.
Using a Land And Buildings Transaction Tax Calculator
The easiest way of calculating the land and buildings transaction tax for a property in Scotland is a land and buildings transaction tax calculator. However, while you can easily find a land and buildings transaction tax calculator if you need one, it is worth understanding how the figure is arrived at and what the land and building transaction tax is from a legal perspective.
The LBTT is the equivalent of Stamp Duty, which is charged on the purchase of property in the rest of the UK. The LBTT only applies in Scotland and only to main properties that cost more than £250,000 and secondary residences, just like Stamp Duty. The LBTT is due to change in 31st March 2021, so be aware of that if you are expecting to purchase after that date.
The current limit of £250,000 has been set due to the ongoing Covid-19 pandemic. The Scottish government is hoping to encourage property buying while the market is depressed, but has stressed that these measures are temporary. The transaction limit before LBTT is applied is set to revert to its original figure of £145,000 on 1st April 2021. However, no one knows what the situation will be then, so it is perfectly possible that a different limit is introduced on that date. This is something that you should keep in mind if you are going to be purchasing a property in the new year.
The limit of £250,000 currently applies across the board, but in normal times, first-time buyers are subjected to a slightly different limit, £175,000 instead of £145,000. Whether first-time buyers will be returned to a different limit in April remains to be seen.
The LBTT is calculated according to the price you pay for the property and is divided into bands in a similar manner to stamp duty. The first £250,000 you pay for a property is exempt from the tax. Any money you pay between £250,001 and £325,000 will be taxed at 5%. Then at 10% between £325,001 and £750,000. Any amount paid over £750,000 is taxed at a rate of 12%.
If the property being purchased is a second home, it will also be subjected to an additional charge of 4% if it costs £40,000 or more.
Land and Building Transaction Tax And Buy-To-Let Second Homes
During the current LBTT system, purchases of buy-to-let properties and second homes are able to benefit from the new rates. However, buyers will still need to pay a 4% surcharge on the price they pay. The current tax bands are the same as those outlined above. However, buyers of second homes and similar properties will have to pay rates of 4%, 9%, 14%, and 16%, respectively.
As above, this tax regime is due to change at the beginning of April 2021. As things currently stand, buy to let and second home purchases will once again be subjected to the same tax system that they used to be, which is as follows:
- £0 – £40,000 = 0%
- £41,000 – £145,000 = 3%
- £250,001 – £325,000 = 8%
- £325,001 – £750,000 = 13%
- £750,000+ = 15%
Purchasing a property is a lot more difficult than many people realise. If you have the right team of professionals on your side, everything goes a lot more smoothly and you can avoid any nasty surprises. However, if you try to proceed without the right advice, and without knowing what you are doing, there are plenty of potholes you can fall into. Understanding your tax liabilities is just one of the many aspects of property purchases that go right over many people’s heads.
Anyone who is planning on purchasing a property in Scotland needs to be aware of the LBTT and how much it is likely to be for them. While the Covid-19 pandemic is ongoing, more generous rates have been made available, and people will be looking to take advantage of these. If you want to take advantage of the new rates on the purchase of new properties, you need to act fast. Come April 2021, the old system is set to come back into force.