Guidance on LBTT Rules for Connected Companies in Lease Transactions

LBTT on leases between connected companies and market value rules

When a lease transaction involves connected parties and the buyer is a company, LBTT is not always based only on the rent or premium actually agreed. The law can substitute market value instead, which may create a deemed premium where a lease is granted at below-market rent, even if no premium is paid.

• The rule can apply on the grant of a lease, on termination, or on assignation, and the “buyer” changes depending on the transaction.
• If the buyer is a company connected with the seller, or if consideration includes shares in a company connected with the seller, market value rules may replace the actual price.
• For a new lease, the actual rent is still considered separately, but a below-market rent may also give rise to a deemed non-rent premium.
• This means a lease with low rent and no stated premium can still trigger LBTT as if a premium had been paid.
• The key practical issue is valuation, including identifying the market rent and the premium a tenant would have paid on the open market for the benefit of favourable lease terms.
• If the lease is granted at full market rent, there may be no deemed premium, so the usual rent-based LBTT calculation may be all that matters.

Scroll down for the full analysis.

LBTT on leases between connected companies: when market value can replace the actual price

This page explains a special LBTT rule for lease transactions involving connected companies. In some cases, LBTT is not worked out simply by looking at the rent or premium the parties actually agree. Instead, the law can substitute market value. That matters because a lease granted on favourable terms within a group or between connected persons can still create an LBTT charge as if a larger premium had been paid.

What this rule is about

LBTT is normally charged on the consideration given for a land transaction. For leases, that usually means looking separately at rent and at any premium or other non-rent consideration.

However, special rules apply where the buyer in a lease transaction is a company and there is a connection between the parties, or where the consideration includes shares in a company connected with the seller.

For these purposes, the “buyer” in a lease transaction can be different depending on the type of transaction:

• on the grant of a new lease, the buyer is the tenant
• on termination, the buyer is the landlord
• on assignation, the buyer is the assignee

The main purpose of the rule is to stop LBTT being reduced simply because connected parties choose a price or rent that is below market level.

What the official source says

Revenue Scotland states that where the buyer is a company and:

• the seller is connected with the buyer, or
• some or all of the consideration consists of the issue or transfer of shares in a company connected with the seller,

the normal lease rules are modified.

Where the buyer is a company connected with the seller, the chargeable consideration is treated as being at least the market value of the subject matter of the transaction. If the transaction is the grant of a lease, the actual rent payable is then added on top.

The guidance also explains an important practical consequence where the lease rent is below a full market rent. In that situation, it is assumed that the market value premium for the lease would reflect the lower rent. That assumed premium is treated as consideration other than rent. So LBTT can arise on a deemed premium even though no actual premium is paid.

The guidance says this rule is subject to the same exceptions as apply to other connected party transactions, although the page does not set those exceptions out in detail.

What this means in practice

If a company takes a lease from a connected person or connected company, you cannot stop at the wording of the lease and ask only:

• what rent is actually payable, and
• whether any premium is actually paid.

You also need to ask what the lease is worth on the open market.

If the agreed rent is lower than a market rent, the legislation may effectively treat the lease as including a market-value premium. That deemed premium is charged as non-rent consideration, in addition to any LBTT consequences of the rent itself.

This can produce a result that surprises taxpayers. A lease with a low annual rent and no stated premium may still be taxed as if a premium had been paid, simply because the tenant company is connected with the landlord and the bargain terms have value.

By contrast, if the lease is granted at a full market rent, there may be no deemed premium. In that case, the LBTT position may depend only on the rent calculation in the usual way.

How to analyse it

A sensible way to approach this issue is:

• Identify the type of lease transaction: grant, termination, or assignation.
• Identify who counts as the buyer for that transaction.
• Check whether the buyer is a company.
• Check whether the seller is connected with that company, or whether the consideration includes shares in a company connected with the seller.
• If the rule applies, consider the market value of the subject matter of the transaction.
• For the grant of a lease, consider whether the agreed rent is below market rent.
• If the rent is below market, consider whether the difference in value would be reflected in a premium that a market tenant would pay.
• Treat that premium as non-rent consideration, with the actual rent still considered separately.

In practical terms, the key valuation question is often this: if the lease had been granted on the open market at this low rent, what premium would a tenant have paid for that advantage?

The source material also points readers to the general meaning of market value. That means the valuation exercise is not based on what the connected parties happen to think is fair between themselves, but on an open market standard.

Example

Illustration based on the official example.

An individual grants a 10-year lease of a garage to his family company. The annual rent is £2,000. Over the lease term, the net present value of that rent is below the nil-rate threshold, so looking at rent alone there would be no LBTT charge.

But suppose the market rent for the garage would be £5,000 a year. A tenant getting the lease at only £2,000 a year would be receiving something valuable. Revenue Scotland’s example assumes that this bargain would be reflected in a market-value premium of £15,000.

That £15,000 is treated as chargeable consideration other than rent. So LBTT can be due on that deemed premium, even though no premium is actually paid.

The example also shows the contrast. If the lease had instead been granted at the full market rent, there would be no deemed premium. If the rent calculation then stayed below the nil-rate threshold, no LBTT would have been payable, although a return might still be required.

Why this can be difficult in practice

The main difficulty is valuation.

The legislation and guidance point to market value, but working out the market value of a lease transaction can be fact-sensitive. In particular:

• deciding the true market rent may require evidence
• working out the premium that reflects a below-market rent is not always straightforward
• different valuers may take different views on the value of the tenant’s advantage
• the connected-party exceptions mentioned in the guidance may matter, but they are not explained on this page

Another point that can cause confusion is that rent and premium are not merged into a single figure. For the grant of a lease, the guidance indicates that the market value element can produce a deemed premium, while the actual rent is still brought in separately.

It is also easy to miss that these rules are not limited to the grant of a lease. The page says they can also apply where the relevant buyer is the landlord on termination or the assignee on assignation, provided the statutory conditions are met.

Key takeaways

• Where a company is the buyer in a lease transaction and the parties are connected, LBTT may be based on market value rather than only on the actual terms agreed.
• If a lease is granted at less than a market rent, the law may treat the tenant company as giving a deemed premium, even if no premium is written into the lease.
• The difficult part is often valuation: you need to consider market rent, market value, and whether any connected-party exception changes the result.

This page was last updated on 24 March 2026

Useful article? You may find it helpful to read the original guidance here: Guidance on LBTT Rules for Connected Companies in Lease Transactions

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