Guidance on LBTT Contracts, Conveyance, Substantial Performance, and Completion Rules

When LBTT arises on Scottish property contracts and conveyances

For most Scottish property purchases, Land and Buildings Transaction Tax (LBTT) is usually triggered at settlement, not when missives are concluded. However, if the contract is substantially performed before settlement, the effective date can move earlier and LBTT may become due before formal completion.

• Signing a binding contract for a land transaction that will later be completed by conveyance does not usually, by itself, create the LBTT charge.
• The effective date is normally the settlement date, unless the contract is substantially performed first.
• Substantial performance can happen if the buyer takes possession of all or most of the property, pays a substantial part of the price, or transfers rights so a third party can demand the conveyance.
• There is no fixed percentage for what counts as a substantial payment, so the facts of each case matter.
• If substantial performance happens and the deal is later completed, the law can treat these as separate transactions, with further tax only on any extra consideration.
• If a substantially performed contract later falls through, the buyer may be able to reclaim LBTT, subject to the correct procedure and time limits.

Scroll down for the full analysis.

LBTT contracts and conveyances: when the tax point arises

This page explains when a contract for a Scottish land transaction becomes chargeable for Land and Buildings Transaction Tax (LBTT). In most ordinary purchases, signing the contract does not itself trigger the tax. The key issue is usually the effective date: the date that determines when the transaction is treated as taking place for LBTT purposes. That date is often settlement, but it can be earlier if the contract is substantially performed.

What this rule is about

Scottish property transactions are often carried out in two stages. First, the parties enter into a binding contract, usually by concluding missives. Later, the transaction is completed by the conveyance, usually the disposition at settlement.

The legislation draws an important distinction between those two stages. Where a contract is to be completed by a conveyance, the buyer is not treated as having entered into a land transaction merely because the contract has been signed. Usually, the land transaction is treated as taking place when the contract is completed.

However, the legislation also recognises that parties may act on the contract before formal completion. If that happens, the contract may be treated as substantially performed. That can bring the effective date forward and trigger LBTT before settlement.

What the official source says

Revenue Scotland’s guidance, based on sections 8, 9, 10, 14 and 58 of the Land and Buildings Transaction Tax (Scotland) Act 2013, says the following.

If a contract for a land transaction is to be completed by a conveyance, entering into the contract does not by itself amount to the land transaction. In a standard house purchase, the contract is the missives and the conveyance is the disposition. If nothing unusual happens before completion, the effective date is the date of settlement.

A contract for a land transaction is entered into when missives are concluded in writing. The Requirements of Writing (Scotland) Act 1995 requires writing for contracts creating, transferring, varying or extinguishing a real right in land.

The legislation uses the concept of substantial performance to deal with non-standard cases. A contract is substantially performed if any of the following happens:

• the buyer, or a person connected with the buyer, takes possession of the whole or substantially the whole of the premises;
• a substantial amount of the consideration is paid or provided; or
• there is an assignation, sub-sale, or other transaction under which a third party becomes entitled to call for a conveyance, except where sub-sale development relief applies.

Revenue Scotland says what counts as a substantial amount of the consideration must be judged case by case. The legislation does not set a fixed percentage. The guidance specifically says that, depending on the facts, even less than 90% could be substantial.

If the contract is completed by a conveyance without having first been substantially performed, the contract and conveyance are treated as a single land transaction and the effective date is completion.

If the contract is substantially performed before completion, the contract itself is treated as the transaction and the effective date is the date of substantial performance.

If a contract is substantially performed and later formally completed, the contract and the later completion are treated as two separate land transactions. But tax on the second transaction is charged only on any consideration that exceeds the consideration for the first transaction. Revenue Scotland notes that there may still be a requirement to notify the completion.

If a contract has been substantially performed but is later rescinded, annulled, or otherwise not brought into effect, tax already paid may be repaid to the buyer. The route for the claim depends on timing. If the claim is made within 12 months of the filing date, it must be made by amending the LBTT return. After that, the claim must be made under the claims provisions in the Revenue Scotland and Tax Powers Act 2014, subject to the time limit stated there.

The guidance also notes that separate rules apply to leases that are substantially performed without being executed.

For conditional contracts, Revenue Scotland says the contract date will usually still be the date the conditional contract was entered into or signed, because a binding contract has been made at that point. The guidance also says Revenue Scotland may look more closely at cases where it believes this rule has been abused.

What this means in practice

In an ordinary residential purchase, the practical answer is simple: LBTT is usually triggered at settlement, not when missives are concluded.

But that simple position can change if the buyer gets the practical benefit of the property before settlement, or pays a large part of the price early, or rights under the contract are passed on in a way that gives someone else the right to demand the conveyance.

That matters because the effective date affects when the LBTT return and payment obligations arise. If substantial performance happens before formal completion, the tax point may arise earlier than the parties expected.

It also matters where a transaction starts one way and ends another. For example, if a contract is substantially performed and then later completed, the law does not simply ignore the first stage. Instead, it treats the substantial performance and the completion as separate land transactions, while preventing double taxation on the same consideration by charging the second transaction only on any excess consideration.

If the deal later collapses after substantial performance, the buyer may be entitled to recover LBTT already paid. But the method and time limit for doing that depend on when the claim is made.

How to analyse it

When working out the LBTT position, it helps to ask the questions in this order.

• Is there a contract for a land transaction that is intended to be completed by a conveyance?
• When were missives concluded in writing, so that there is a binding contract?
• Has the contract been completed by conveyance? If yes, and there was no earlier substantial performance, the effective date is normally completion.
• Before completion, did the buyer or a connected person take possession of the whole or substantially the whole of the premises?
• Before completion, was a substantial amount of the consideration paid or provided?
• Before completion, was there an assignation, sub-sale or similar arrangement giving a third party the right to call for a conveyance?
• If one of those events happened, on what date did substantial performance occur?
• If the contract was later completed, was there any additional consideration beyond what was already taken into account?
• If the contract was later abandoned, rescinded or annulled, is a repayment claim available and is it still within the relevant time limit?
• If the contract is conditional, is it nevertheless already binding under Scots law?

For possession, the focus is on whether the buyer has in substance taken control of the property, not just whether the formal title has transferred.

For consideration, the guidance makes clear there is no automatic percentage test. A payment that looks less than overwhelming in percentage terms may still be substantial in context.

For conditional contracts, the important point is that a contract can still be binding even though performance depends on a suspensive condition. The existence of a condition does not automatically postpone the contract date.

Example

Illustration: A buyer concludes missives for a house purchase, with settlement due one month later. Before settlement, the seller allows the buyer to move into the property. Even though the disposition has not yet been delivered, that early possession may amount to substantial performance. If it does, the effective date for LBTT is likely to be the date possession was taken, not the later settlement date.

Illustration: A buyer enters into a contract, pays a very large deposit before settlement, and then the transaction falls through. If the early payment amounted to substantial performance, LBTT may already have become chargeable. If the contract is later rescinded and never brought into effect, the buyer may be able to claim a repayment, subject to the relevant procedure and time limits.

Why this can be difficult in practice

The main difficulty is that substantial performance is partly factual and not fully defined by a bright-line statutory test.

The clearest example is payment of a substantial amount of the consideration. Revenue Scotland expressly says there is no fixed percentage. That means the answer depends on the facts and context, not on a simple numerical threshold.

Possession can also be fact-sensitive. Temporary access, limited occupation, or practical arrangements before settlement may raise questions about whether the buyer has really taken possession of the whole or substantially the whole of the premises.

Conditional contracts can be another source of confusion. People sometimes assume that a contract subject to conditions does not count until the conditions are satisfied. The guidance does not support that broad assumption. The key point is whether there is already a binding contract.

Finally, where a transaction is substantially performed and then completed, or substantially performed and then abandoned, the compliance consequences can be easy to miss. There may be an earlier return obligation, a later notification obligation, or a repayment process, depending on what happened.

Key takeaways

• In a normal Scottish purchase, LBTT usually arises at settlement, not when missives are concluded.
• If the contract is substantially performed before completion, the effective date can move forward to the date of substantial performance.
• Substantial performance is fact-sensitive, especially where the issue is whether a substantial amount of the price has been paid.

Source reference: Revenue Scotland, LBTT1005, “Contract and conveyance”, last updated 22 March 2023.

This page was last updated on

Useful article? You may find it helpful to read the original guidance here: Guidance on LBTT Contracts, Conveyance, Substantial Performance, and Completion Rules

View all LBTT Guidance Pages Here