Guidance on LBTT Chargeable Consideration for Construction and Improvement Works

LBTT and Building Works: When Construction Costs Are Ignored or Included

For LBTT, the value of building, improvement or repair works can sometimes be left out of the taxable consideration for a land purchase. This only applies where the works are carried out after the transaction takes effect, on the land being bought, and the seller or a connected person is not required to do them. If those conditions are not met, or if the overall deal is really for land with completed buildings, the value of the works is likely to be included.

• Works are ignored for LBTT only if they are done after the effective date, on the land acquired, and not by the seller or someone connected with the seller.
• If any of those conditions fail, the works count as chargeable consideration and must be valued at their open market value.
• Having separate land and building contracts does not by itself keep construction costs out of LBTT; Revenue Scotland looks at the substance of the whole arrangement.
• If the contracts are so closely linked that the buyer is really acquiring completed property, the total amount under both contracts may be taxed.
• Special care is needed where a contract is substantially performed before formal completion, as there may be two notifiable transactions and a special rule can apply.
• There is also a separate rule for some transactions involving public or education bodies, so this is not the full analysis in every case.

Scroll down for the full analysis.

LBTT and building works: when the value of works is ignored and when it counts as consideration

This page explains how Land and Buildings Transaction Tax (LBTT) treats building, improvement and repair works that form part of the deal for land. The point matters because, in some transactions, the buyer is not just paying money for the land. They may also be agreeing to carry out works. The question is whether the value of those works is part of the taxable consideration.

What this rule is about

LBTT is charged by reference to the chargeable consideration for a land transaction. Usually that means money or money’s worth given for the land. Problems arise where, instead of paying only cash, the buyer also agrees to build, improve or repair something.

Schedule 2 paragraph 11 of the Land and Buildings Transaction Tax (Scotland) Act 2013 sets out when the value of those works is left out of chargeable consideration, and when it must be included.

The guidance also notes that this rule is subject to a separate rule for certain arrangements involving public or education bodies. So this page is not the whole story in every case.

What the official source says

If the whole or part of the consideration for a land transaction consists of carrying out works of construction, improvement or repair of a building, or other works that enhance the value of land, the value of those works is ignored for LBTT only to the extent that all of the following conditions are met:

• the works are carried out after the effective date of the transaction;
• the works are carried out on the land acquired, or to be acquired, under the transaction; and
• it is not a condition of the transaction that the works are carried out by the seller or a person connected with the seller.

If those conditions are not met, the value of the works is taken into account as chargeable consideration.

The value of the works is measured by the amount that would have to be paid in the open market for those works.

The guidance also deals with a contract that is substantially performed before formal completion and then later completed by conveyance. In that situation there may be two notifiable transactions. For the second transaction, the first condition above is treated as met if it was met for the first transaction.

Finally, the guidance warns that where there is both a land sale contract and a building contract, Revenue Scotland will consider whether, taken together, they amount in substance to a sale of land with completed buildings. If they do, the total consideration under both contracts is chargeable. If not, and the purchase and development contracts are not so interdependent that one cannot stand without the other, LBTT will generally be calculated only on the consideration attributable to the land transfer, using a just and reasonable apportionment.

What this means in practice

The key practical question is whether the buyer’s obligation to do works is really part of what the seller is receiving for the land.

Not every building obligation increases LBTT. The legislation allows some post-transaction works to be ignored. But that is only where the works are genuinely future works on the land being acquired, and the seller is not requiring that the works be carried out by the seller or someone connected with the seller.

This distinction is important in development transactions. A buyer may acquire a site and separately arrange for a contractor to build on it afterwards. In the right circumstances, the construction cost will not be part of the LBTT consideration for the land purchase.

By contrast, if the arrangements are really for the buyer to acquire land together with completed buildings, or if the seller or a connected person is contractually required to carry out the works, the value of those works is much more likely to be included.

The guidance points to a substance-over-form exercise. Simply splitting the paperwork into a land contract and a building contract does not automatically keep the building cost out of LBTT. What matters is how the arrangements work as a whole.

How to analyse it

A sensible way to analyse the point is to ask these questions in order:

• Is any part of the consideration for the land transaction made up of works rather than cash?
• What exactly are the works: construction, improvement, repair, or other works enhancing land value?
• When will the works be carried out? The exemption only applies if they are carried out after the effective date of the transaction.
• Where will they be carried out? They must be on the land being acquired under the transaction.
• Who is to carry out the works? If the transaction requires the seller or a connected person to do them, the condition is not met.
• Are there separate land and construction contracts? If so, are they truly separate in substance, or are they so linked that the deal is really for completed property?
• If the works must be valued, what is their open market value?
• Has the contract been substantially performed before completion? If yes, consider the special rule for the second notifiable transaction.

When looking at linked land and construction contracts, the guidance suggests focusing on whether the contracts are so intertwined that failure of one prevents completion of the other or makes the other invalid. If that level of dependency exists, the combined arrangements may be treated as a sale of land with completed buildings.

Example

Illustration: a buyer agrees to buy a plot of land. After completion, the buyer separately engages an unconnected building contractor to construct a house on that plot. The building works take place after the effective date, on the land acquired, and the land transaction does not require the seller or a connected person to carry out the works. On the face of the guidance, the value of those works would not count as chargeable consideration for LBTT.

Now change the facts. The sale contract and the building contract are designed so that the buyer is effectively committed to buy a finished house from arrangements controlled by the seller, and the contracts are so interdependent that one cannot proceed without the other. In that case, Revenue Scotland may conclude that the real transaction is the sale of land with completed buildings, so the total amount under both contracts would be brought into account.

Why this can be difficult in practice

The difficult part is usually not the wording of the three statutory conditions. It is deciding what the transaction really is.

In straightforward cases, the answer is clear. But many development arrangements sit somewhere in between a bare land purchase and a purchase of completed property. The outcome can turn on the contractual structure and the commercial reality.

Points that may need close attention include:

• whether the buyer is free to walk away from the building contract while still completing the land purchase;
• whether the seller has any continuing role in providing the completed building;
• whether the contractor is connected with the seller;
• whether the contracts are conditional on each other;
• what happens if the building contract fails or is terminated; and
• whether the documents reflect a genuine separation between buying land and commissioning later works.

The open market valuation of works can also be a practical issue if the value must be included. The legislation points to market value, not simply whatever figure the parties choose to allocate.

The guidance also makes clear that there is a separate rule for certain arrangements involving public or education bodies. That means this paragraph 11 analysis may not be the end of the enquiry in those cases.

Key takeaways

• Post-transaction works can be left out of LBTT consideration, but only if all statutory conditions are met.
• If the seller or a connected person is required to carry out the works, or the arrangements are really for completed property, the value of the works is likely to count.
• Separate land and building contracts are not decisive on their own; the real substance and interdependence of the arrangements matter.

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Useful article? You may find it helpful to read the original guidance here: Guidance on LBTT Chargeable Consideration for Construction and Improvement Works

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