HM Insights

Land and Buildings Transaction Tax: the issues for investors in the private rented sector in Scotland

Private Rented Sector (PRS) housing has gained increasing attention as a destination for investment funds. The PRS sector is expected to expand very significantly, with more than 60,000 units in the UK pipeline according to the British Property Federation. While much of the focus is on large "build to rent" schemes attracting institutional funding, many of the same issues will apply to portfolios of older established properties.

Here we take a look at how the Scottish Land and Business Transaction Tax affects PRS investments differently as compared to the rest of the UK, and why in some circumstances this can reduce PRS acquisition costs in Scotland.

Private Rental Sector Lbtt Scotland Investment Additional Dwelling Supplement

Land and Business Transaction Tax

One of the important areas investors in Scotland need to consider is the position under the Scottish Land & Buildings Transaction Tax (LBTT) regime administered by Revenue Scotland. LBTT is the successor to UK-wide SDLT, which in turn replaced stamp duty in 2003. The tax position gives investors in Scottish PRS schemes a possible advantage over those investing in the rest of the UK.

In order to calculate the LBTT due on a PRS portfolio transaction (6 or more dwellings), the purchaser has to calculate the tax due in two different ways, and the tax payable is the higher of the two calculations.

The first calculation is carried out by dividing the total consideration by the number of dwellings, working out the tax payable at residential rates on this average transaction and multiplying by the number of dwellings.

The second calculation is to take 25% of the tax due if the whole transaction was treated as a commercial purchase. 

There are separate provisions to deal with purchases which include both residential and commercial property.

Additional Dwelling Supplement

The Scottish Government followed the UK Government in introducing "additional dwelling supplement" on 1 April 2016. As in the rest of the UK, this adds an additional layer of LBTT to the purchase of residential property which is not the purchaser's main residence. The tax payable is 3% on the whole of the consideration.

However, unlike the position in the rest of the UK, there is a relief from this available if the purchaser is buying six or more dwellings in the same transaction ("multiple dwelling relief"). Therefore in a typical PRS transaction there will be no additional dwelling supplement payable.

Get in touch

If you would like to discuss the issues raised in this article or any other issues about PRS or LBTT please get in touch.