Chapter 3: Seeding Relief
30. Following changes made through the UK Finance Act 2016, a relief from SDLT is available where properties (that are predominantly non-residential) are acquired or “seeded” from other types of investment vehicles (such as un-authorised managed funds) into an PAIF or CoACS within a period of up to 18 months.
31. The Scottish Government is consulting on the proposition of providing parity with SDLT in terms of a seeding relief. This proposal would not change the fundamental point that tax will be due whenever a PAIF or CoACS acquires a new property. Seeding relief is a time-limited proposition which recognises that beneficial ownership of the property is essentially not changing. After seeding, where new properties are acquired, LBTT tax would be due.
32. PAIFS and CoACS are both authorised financial vehicles that can be used for the purposes of collective property investment. The term ‘seeding’ refers to the transfer or acquisition of properties from an existing portfolio to a new or empty fund. Often new funds need to be ‘seeded’ as they are conversions from other types of fund taking advantage of this new tax status (and therefore transfer/seed the underlying assets into the CoACS or PAIF). A fund will also require a seeding period to build up a track record of performance in order to attract new investors.
33. The UK Government rationale for this relief was primarily aimed at encouraging the growth of fund management in the UK, subject to addressing its concerns over the potential for tax avoidance. As stated in its publications ‘ UK Investment Management Strategy’ and ‘ UK Investment Strategy 2’(  ), the approach taken to these funds represents the UK’s broader approach to relieve the burden of double taxation of income received by UK managed funds so as to encourage international investors to use UK institutions whilst reducing the risk of incurring UK tax in so doing.
34. The UK relief requires that the following conditions must be met:
- The purchaser of the new properties must be a PAIF or CoACS;
- The subject matter of the seeding transaction must be one or more interests of land;
- The only consideration for the transaction is for the vendor to issue units in the CoACS or shares in the PAIF; and
- The date of the transaction must be conducted in the seeding period which is 18 months within which seeding transactions are eligible for relief, provided that:
- the fund has not yet been opened to investors; and
- the sole consideration for a transfer is units in the fund acquiring the property portfolio.
35. For the purposes of SDLT, the seeding period begins on the date that the first property is seeded and ends on the date that the first investor invests or alternatively 18 months after the first property seeding date – whichever is shorter. The provision to allow this extended period was intended to reflect the position that it may not be practical to transfer a significant property portfolio into a new vehicle at the same time. In addition, there are anti-avoidance rules in place and the UK has introduced claw back provisions, as set out in Chapter 5.
36. Since 2015 stakeholders have requested that the Scottish Government go beyond the current reliefs in place under LBTT in relation to property investment and replicate this seeding relief in LBTT. Whilst legislation has been introduced to allow an Authorised Unit Trust to convert into a PAIF without a incurring a LBTT charge, the same is not true for other investment vehicles, or indeed AUT’s converting to a CoACS.
37. Stakeholders have argued that a change to LBTT in this area is particularly important to the property investment sector as: (i) properties are currently held in investment funds on a UK wide basis; and (ii) the SDLT/ LBTT treatment of these schemes is not dependent on the domicile of the fund, but rather the geographical location of the properties they contain.
38. As such, as the legislation currently stands, no SDLT will be due on any property owned in England and Northern Ireland that is seeded into a PAIF or CoACS. However, any Scottish property transferred in would be subject to an LBTT charge.
39. From stakeholder engagement to date, the Scottish Government understands that there is little appetite for paying LBTT in order to allow for these transfers, particularly given that the percentage of Scottish properties held will be relatively low when compared to the overall portfolio makeup.
40. In the immediate term, it is argued that this could make it less attractive for fund managers who are considering conversion to invest in properties in Scotland, on the basis that an LBTT charge would mean that they could not subsequently be seeded into a different vehicle.
41. In addition, whilst we understand that claw back provisions and anti-avoidance measures in the SDLT legislation have meant that seeding transfers have not occurred as extensively as expected to date, if no changes are made, our discussions with industry representatives suggest that it may lead investment and pension funds to opt to divest of Scottish properties at the point of seeding other properties into a PAIF or CoACS.
42. Once divested, there is a clear risk that investment fund and asset managers will not look again at Scottish properties, putting Scotland at a comparative disadvantage to the rest of the UK in terms of encouraging investment in the property market, particularly commercial property.
43. By contrast, if Scottish properties can be seeded in to the new investment vehicles, the companies that have engaged with the Scottish Government to date have indicated that investors would wish to maintain a broadly consistent Scottish holding in future (levels currently in the range of 7-10%). Thus, as a PAIF or a CoACS grows in size, so too would its investment in Scotland.
44. Aside from the economic and investment aspects above, in considering this issue, the Scottish Government will take into account that the LBTT regime already provides relief for other types of corporate transactions in which there is no change in the economic beneficiary, rather than the substance, of ownership. This is notably the case in relation to group relief (Schedule 10 of the Act) and reconstruction and acquisition relief (Schedule 11 of the Act).
45. Whilst stakeholders have suggested that parity with SDLT would make the administration of these funds more straightforward to manage, providing parity on PAIFs and CoACS would also increase the complexity of LBTT itself and could open up opportunities for artificial tax avoidance. In order to safeguard public finances, we are accordingly also very keen to capture views on any negative impacts associated with providing parity with SDLT in this area, including the anti-avoidance and claw back provisions discussed in Chapter 4.
46. If the Scottish Government were to introduce a relief, recognising that properties are being held on a UK basis, we would expect to mirror the UK relief in the first instance.
Question 3: Do you consider that the Scottish Government should introduce a seeding relief for PAIFs and CoACS?
Question 4: Please briefly describe any positive or negative impacts that would accompany LBTT parity with SDLT for a seeding relief.
Question 5: With regards to a seeding relief - how would a ‘do nothing’ approach on the part of the Scottish Government affect your business and future business decisions?
Question 6: If the Scottish Government were to proceed with a LBTT seeding relief, are there any aspects of the SDLT arrangements which you believe should be changed if replicated for LBTT purposes?