LBTT Guidance on Tax Relief for Alternative Property Finance Lease Arrangements

LBTT relief for alternative property finance using a lease or sub-lease

This relief is aimed at lease-based alternative property finance arrangements in Scotland, where a financial institution buys a property, leases or sub-leases it to the customer, and later transfers it to the customer. Its purpose is to prevent more LBTT being charged than would usually arise on a normal purchase funded by a mortgage, but the relief only applies if strict conditions are met.

• The arrangement normally has three stages: the financial institution buys the property, grants a lease or sub-lease to the customer, and then transfers the property to the customer later.
• The second and third transactions can be relieved from LBTT, but the first transaction is usually still chargeable unless a specific first-transaction relief applies.
• Relief for the later stages depends on the first transaction having been properly dealt with, including payment of any LBTT due.
• For relief on the final transfer, the property must remain held by a financial institution and the lease or sub-lease must remain held by the customer throughout the period before transfer.
• The relief is not available if certain other reliefs apply to the first transaction, have been withdrawn, or if connected arrangements involve someone acquiring control of the financial institution.
• The financial institution’s interest may be treated as an exempt interest for some later transfer and notification purposes, but that does not make the first or third transactions exempt, and they can still be notifiable.

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LBTT relief for alternative property finance using a lease or sub-lease

This page explains a specific LBTT relief for alternative property finance arrangements where a financial institution buys property, leases or sub-leases it to the customer, and later transfers it to that customer. The relief is designed to stop these arrangements suffering more LBTT than an ordinary purchase funded by a conventional mortgage.

What this rule is about

Some finance structures involve more than one land transaction. Instead of the buyer purchasing the property directly with mortgage finance, a financial institution first acquires the property, then grants a lease or sub-lease to the customer, and finally transfers the property to the customer at the end of the arrangement.

Without special rules, that sequence could trigger LBTT more than once, because there are multiple transactions involving land. Schedule 7 to the Land and Buildings Transaction Tax (Scotland) Act 2013 provides relief so that, if the statutory conditions are met, the overall tax result is broadly aligned with a conventional mortgage-backed purchase.

What the official source says

The official guidance describes a three-stage structure:

• the first transaction: the financial institution buys a major interest in land;
• the second transaction: the financial institution grants a lease or sub-lease to the customer;
• the third transaction: the financial institution transfers the property to the customer at the end of the term.

The guidance says the relief works by relieving the second and third transactions from LBTT, and by disapplying the substantial performance rules for the third transaction until that transaction is actually entered into. It also says the third transaction is not treated as the grant of an option for the purposes of the LBTT rules on options and rights of pre-emption.

The first transaction will usually still be chargeable to LBTT. However, relief for the first transaction may also be available in two cases:

• where the seller is the same person who enters into the arrangements with the financial institution; or
• where the seller is another financial institution that had itself acquired the interest under similar arrangements with that person.

For the second transaction, the customer may claim relief if the requirements relating to the first transaction have been met, including payment of any LBTT due on the first transaction.

For the third transaction, the customer may claim relief if the requirements for both the first and second transactions have been met and, throughout the period between the second and third transactions:

• the chargeable interest acquired in the first transaction is held by a financial institution; and
• the lease or sub-lease granted in the second transaction is held by the customer.

The guidance also sets out cases where this form of relief is not available. In particular, it is not available if group relief, reconstruction relief or acquisition relief is available for the first transaction, or has been withdrawn from the first transaction. It is also not available where the arrangements, or connected arrangements, involve someone acquiring control of the financial institution. The legislation uses the corporation tax definition of control in section 1124 of the Corporation Tax Act 2010.

What this means in practice

The practical aim is straightforward: if a compliant alternative finance structure is used, the lease stage and the final transfer stage should not create extra LBTT charges simply because the finance is structured differently.

That does not mean every step disappears for LBTT purposes. The first transaction is generally still within charge unless a specific relief applies. The second and third transactions can be relieved, but only if the statutory conditions are satisfied.

This matters because the relief is conditional and transaction-specific:

• the first transaction must be dealt with properly, including any LBTT due being paid;
• the second transaction is relieved only if the first transaction conditions have been met;
• the third transaction is relieved only if the first and second transaction conditions have both been met, and the ownership pattern has remained as required throughout.

The guidance also highlights a separate point about exempt interests. The financial institution’s interest resulting from the first transaction is treated as an exempt interest for certain later transfers. That means a transfer of that exempt interest is not chargeable and is not notifiable. But this does not make the first transaction itself, or the third transaction itself, exempt. Those transactions remain notifiable even if relief is available.

The exempt-interest treatment can also be lost. It ceases if the lease or sub-lease ends, or if the customer’s right to require the final transfer ceases to have effect. In addition, the first-transaction interest is not an exempt interest at all if the first transaction is subject to a claim for group relief, reconstruction relief or acquisition relief.

How to analyse it

A sensible way to analyse these arrangements is to work through the structure in order.

• Is this the right kind of arrangement? There must be a purchase by a financial institution, then a lease or sub-lease to the customer, and an agreement for a later transfer to the customer.
• Who is the seller in the first transaction? This matters because relief for the first transaction is only described for particular cases.
• Has the first transaction been fully complied with for LBTT purposes? The guidance specifically says any LBTT due on the first transaction must have been paid before relief can be claimed on the second transaction.
• Are any incompatible reliefs in play on the first transaction? If group relief, reconstruction relief or acquisition relief is available, or has been withdrawn, this alternative property finance relief is not available.
• Do the wider arrangements involve an acquisition of control of the financial institution? If so, the relief is not available, including where this happens through connected arrangements.
• Between the lease and the final transfer, has the property remained held by a financial institution and the lease remained held by the customer? If not, relief on the third transaction may fail.
• Has anyone assumed the final transfer is taxed early because of substantial performance or option rules? The legislation specifically switches off those consequences for this type of third transaction until the transfer is actually entered into.

In practice, conveyancers and advisers should also distinguish carefully between three different ideas:

• chargeability of the transaction;
• whether relief is available;
• whether an interest is exempt for later transfer and notification purposes.

These are related, but they are not the same thing.

Example

Illustration: A financial institution buys a property from a seller. It then grants a lease to the customer under an alternative finance arrangement, with a contractual obligation to transfer the property to the customer at the end of the term.

If the statutory conditions are met, the lease grant can be relieved from LBTT and the later transfer to the customer can also be relieved. The first acquisition by the financial institution will generally still need to be considered for LBTT in the ordinary way, unless one of the specific first-transaction relief cases applies.

If, however, the lease ends early or the customer loses the right to require the final transfer, the exempt-interest treatment for the financial institution’s interest can cease. That may affect the LBTT treatment of later dealings with that interest.

Why this can be difficult in practice

The statutory design is conceptually simple, but the conditions are easy to misread.

One difficulty is that the guidance deals separately with relief for the first, second and third transactions. A reader might assume that because the arrangement is an approved form of alternative finance, all steps are automatically free of LBTT. That is not what the guidance says.

Another difficulty is the interaction with other reliefs. The guidance says this relief is unavailable where certain corporate reliefs are available for the first transaction, or have been withdrawn. That means the wider tax profile of the transaction group matters, not just the lease finance structure itself.

The reference to arrangements for acquiring control of the financial institution can also be important in structured or connected-party cases. The concept of connected arrangements is wide, because it includes arrangements entered into in connection with the alternative finance arrangements, even if they involve additional persons.

There is also a technical distinction between an exempt interest and a relieved transaction. The financial institution’s interest may be an exempt interest for some purposes, but that does not convert the first or third transaction into exempt transactions. The guidance expressly says relief may be available for those transactions, but they remain notifiable.

Finally, the conditions for relief on the third transaction require continuity over time. That means changes in who holds the relevant interest or the lease between the second and third stages can matter, even if the original structure looked compliant when it was set up.

Key takeaways

• This relief is intended to stop lease-based alternative property finance arrangements suffering more LBTT than a conventional mortgage-funded purchase.
• The second and third transactions can be relieved, but only if the statutory conditions are met and the first transaction has been properly dealt with.
• The rules are lost or restricted in some cases, especially where certain other reliefs apply to the first transaction or where connected arrangements involve acquiring control of the financial institution.

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Useful article? You may find it helpful to read the original guidance here: LBTT Guidance on Tax Relief for Alternative Property Finance Lease Arrangements

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