Guidance on Relief for Alternative Finance Bonds with Asset Substitution Rules
LBTT relief when an AFIB property is replaced
LBTT relief for an alternative finance investment bond can continue when the original property is swapped for another, but only if the legal conditions are met for both the original and replacement land. The original property must be transferred back before the bond ends, the replacement arrangement must be set up properly, and the replacement property must meet the value test. If the original Scottish property is subject to a registered security, that security is only discharged once the required evidence is provided.
- The original land must satisfy conditions A to C and G, and the bond-issuer must stop holding it as a bond asset before the bond ends.
- The original land must be transferred back to the bond-holder, and new arrangements must be entered into for the replacement land.
- The replacement land must be worth at least as much, at the time it is transferred to the bond-issuer, as the original land was worth at the first transaction.
- If condition F was not met for the original land, relief may still continue if conditions A, B, C, F and G are met for the replacement land.
- Where the original land is in Scotland, any registered security over it is only discharged after prescribed evidence is given, with different evidence rules depending on whether the replacement land is in Scotland.
- The same substitution rules can apply again if the replacement property is later replaced by another property.
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Read the original guidance here:
Guidance on Relief for Alternative Finance Bonds with Asset Substitution Rules
LBTT relief when an alternative finance investment bond swaps one property for another
This page explains how Land and Buildings Transaction Tax relief can continue where an alternative finance investment bond uses one land asset at first, and later replaces it with another. The rules are technical, but the basic point is simple: the legislation can preserve the relief when the original bond property is substituted, provided the statutory conditions are met for both the old and the new asset.
What this rule is about
Alternative finance investment bond relief is designed for certain Sharia-compliant financing arrangements. In these structures, land may be acquired and held by a bond-issuer as a bond asset rather than by the person who is economically using the arrangement.
This page deals with a particular complication: what happens if the original bond asset is later replaced with different land before the bond ends. Without special rules, that kind of substitution could disrupt the relief or leave the original Scottish land subject to a registered security for tax purposes. Schedule 8 contains rules intended to let the arrangement continue on a replacement asset, if the required conditions are satisfied.
The source material assumes familiarity with the conditions for AFIB relief set out elsewhere, especially conditions A to G. This page does not restate those conditions in full, but explains how the substitution rules use them.
What the official source says
The legislation allows relief to apply where one bond asset is substituted for another, but only through a specific mechanism.
In outline, the following must happen:
- Conditions A to C and G must be met for the original land.
- The bond-issuer must stop holding the original land as a bond asset before the bond terminates, and transfer that original land to the bond-holder.
- The bond-holder and bond-issuer must enter into further arrangements that satisfy condition A in relation to an interest in the replacement land.
- When the replacement land is transferred from the bond-holder to the bond-issuer, its value at that time must be at least equal to the value of the original land at the time of the first transaction.
The legislation then modifies how some of the AFIB conditions apply in a substitution case:
- Condition F does not need to have been met for the original land, if conditions A, B, C, F and G are met for the replacement land.
- Condition E is read by reference to the original land.
- Condition G is read by reference to the first transaction relating to the original land.
The source also deals with the security registered over the original Scottish land under condition D.
If the replacement land is in Scotland, the original land stops being subject to that security when:
- the bond-issuer provides prescribed evidence that condition G has been met for the original land, and
- condition D has been met for the replacement land.
If the replacement land is not in Scotland, the original land stops being subject to that security when the bond-issuer provides prescribed evidence that:
- condition G has been met for the original land, and
- conditions A to C have been met for the replacement land.
In either case, once the required evidence is provided, Revenue Scotland must register a discharge of the security in the Land Register of Scotland within 30 days.
The source specifies what counts as prescribed evidence. This includes the unique transaction reference numbers for the LBTT returns in which relief was claimed on the transfer from the original owner to the bond-issuer and on the transfer back from the bond-issuer to the original owner, together with registration evidence from the Keeper. Additional documentary evidence is required where the replacement land is not in Scotland.
The same rules also apply if there is a later substitution and the replacement land is itself replaced by further replacement land.
What this means in practice
The practical effect is that a qualifying AFIB structure is not necessarily broken just because the original land asset is swapped for another one. But the substitution is not automatic for tax purposes. The parties must be able to show that the statutory sequence has been followed and that the required conditions are met at the correct stages.
Three practical points matter in particular.
First, the original land must have met the relevant starting conditions. The source requires conditions A to C and G for the original land. This means you cannot simply focus on the replacement property and ignore how the arrangement began.
Second, the original land must actually cease to be held by the bond-issuer as a bond asset before the bond ends, and it must be transferred to the bond-holder. This is not just a conceptual substitution. There must be a real transfer out of the bond structure.
Third, the replacement land must fit within a fresh set of arrangements, and its value must not be lower than the value of the original land measured at the relevant statutory time. That value comparison is part of the gateway to relief in a substitution case.
Where the original land is in Scotland, the registered security over that land does not simply fall away because the parties say they have substituted assets. It is released only when the statutory evidence requirements are met. Until then, the original Scottish land remains subject to the security registered under condition D.
How to analyse it
A sensible way to analyse a substitution case is to work through the following questions in order.
- What was the original land, and were conditions A to C and G met for it?
- Did the bond-issuer cease to hold that original land as a bond asset before the bond terminated?
- Was the original land transferred back to the bond-holder?
- Did the bond-holder and bond-issuer enter into further arrangements of the kind required by condition A for the replacement land?
- At the time the replacement land was transferred from the bond-holder to the bond-issuer, was its value at least equal to the value of the original land at the time of the first transaction?
- If condition F was not met for the original land, is the statutory saving available because conditions A, B, C, F and G are met for the replacement land?
- Is the replacement land in Scotland or outside Scotland? That affects what must be shown to discharge the security over the original Scottish land.
- Has the prescribed evidence been assembled, including the relevant LBTT return reference numbers and the Keeper’s registration evidence?
It is also important to separate two issues that can easily be confused:
- whether the substitution rules preserve the relief, and
- whether the security over the original Scottish land can now be discharged.
They are linked, but they are not exactly the same question. The source sets out specific evidence rules for discharge of security, and those need to be checked independently.
Example
This is a simple illustration of how the rule works.
A buyer enters into a qualifying AFIB arrangement involving Scottish land. The bond-issuer acquires and holds that land as the bond asset, and the relevant relief is claimed. Before the bond ends, the structure is reorganised so that the original land is transferred back to the bond-holder and another property is brought into the arrangement as the replacement bond asset.
If the statutory conditions are met for the original land and the replacement land, and the replacement land is worth at least as much at the relevant transfer time as the original land was worth at the time of the first transaction, the substitution rules can preserve the relief. If the replacement land is also in Scotland, the security over the original Scottish land can then be discharged once the bond-issuer provides the prescribed evidence and condition D has been met for the replacement land.
If, however, the replacement asset does not satisfy the required conditions, or the value test is not met, the substitution rules may not operate as intended.
Why this can be difficult in practice
The main difficulty is that the legislation cross-refers heavily to conditions set out elsewhere. A reader must often move back and forth between the substitution rule and the underlying AFIB conditions to understand the result.
Timing is also important. The legislation uses different reference points for value and for satisfaction of conditions. For example, the value of the replacement land is tested when it is transferred from the bond-holder to the bond-issuer, but this is compared with the value of the original land at the time of the first transaction. If valuations are uncertain or the transactions are spread over time, this can become fact-sensitive.
Another practical difficulty is documentary evidence. The source is quite specific about what must be produced to discharge the security over original Scottish land. If the records of the original LBTT returns or Keeper registration documents are incomplete, the parties may struggle to show that the statutory requirements have been met.
There is also a drafting point in the source material dealing with replacement land not in Scotland. One part refers to documents confirming that the replacement land is not in the United Kingdom, even though the heading is about replacement land not in Scotland. Readers should therefore check the underlying legislation and regulations carefully rather than relying only on the summary wording.
Key takeaways
- AFIB relief can continue where one bond asset is replaced by another, but only if the statutory substitution conditions are met.
- The original land, the replacement land, the transfer sequence, and the value comparison all matter.
- Where original Scottish land is subject to registered security, that security is discharged only when the prescribed evidence requirements are satisfied.
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Useful article? You may find it helpful to read the original guidance here: Guidance on Relief for Alternative Finance Bonds with Asset Substitution Rules
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