Land and buildings transaction tax - property investment funds: consultation

Consultation to seek opinions and commentary on the potential introduction of reliefs from LBTT to bring parity with Stamp Duty Land Tax (SDLT) for certain authorised property investment funds.

Specifically a relief for the ‘seeding’ (initial transfe


Chapter 5: Tax Avoidance

Seeding Relief & CoACS

54. To prevent opportunities for artificial tax avoidance, the Scottish approach to taxation seeks to ensure that tax reliefs and exemptions are only introduced where they are supported by a strong evidence base and are aligned with the Scottish approach to taxation.

55. Scottish Ministers have taken a simple, clear but robust approach to tackling artificial tax avoidance for the devolved taxes. The Scottish General Anti-Avoidance Rule ( GAAR), contained in the Revenue Scotland and Tax Powers Act 2014 ( RSTPA ) ( [6] ), allows Revenue Scotland to take counteraction against tax avoidance arrangements which are considered to be artificial, even if they otherwise operate within the letter of the law.

56. There are two different tests of ‘artificiality’, set out in section 64 of RSTPA:

  • one which allows Revenue Scotland to consider the principles and policy objectives of the legislation (for example a scheme set up to exploit a shortfall in the tax legislation) and;
  • the other based on activities that lack real economic or commercial substance.

57. Should any reliefs be introduced, these powers in the GAAR would help combat and deter their abuse. However, like the UK approach, the Scottish Government would look to introduce more targeted provisions to protect revenue.

58. It is also important that any amendment to LBTT will not result in unforeseen consequences to other UK tax regimes (which could also penalise Scottish taxpayers). It is unlikely that the proposed change would affect other UK taxes. However due to the technical nature of tax, the finance industry and property ownership in the UK, we are seeking views from stakeholders to ensure we have properly considered all the possible outcomes.

Question 11: Please identify and describe any impacts on UK taxes (non- SDLT) that could occur following the proposed amendment to LBTT.

59. As mentioned above, the UK’s approach to providing a relief for the exchange in CoACS units is to treat them as a company. This is similar to the approach taken in respect of Unit Trusts in section 45 of the Act. Sub-section (7) of the Act provides that treating the scheme as a company does not entitle them to Group relief. The Scottish Government is keen to understand whether making the proposed changes could potentially impact other LBTT reliefs and exemptions in a similar manner.

Question 12: Can you identify any potential unintended impacts or effects on the current LBTT regime through providing parity with SDLT on the treatment of CoACS or through providing a seeding relief for PAIFs and CoACS?

60. The potential for avoidance around these issues is complex, presents a real risk to revenue and needs to be considered carefully. The Scottish Government is keen to hear from stakeholders on this to ensure that the reliefs have a positive longer term overall impact on economic growth, and as a consequence tax revenues, and that any opportunities for tax avoidance to emerge are properly addressed.

61. Both SDLT and LBTT provide for a charge at market value that will apply to acquisitions of property from connected parties. SDLT also makes the operator of a PAIF or CoACS, as opposed to the unit or share-holders, responsible for filing and payment of SDLT including any tax clawed back.

62. The GDO rules that are currently applied to PAIFs are also applied for the purposes of a CoACS claiming SDLT seeding relief, as a means of ensuring that narrowly held CoACS cannot benefit from seeding relief. If the Scottish Government were to introduce similar reliefs, then it would be likely that this would also be our starting point to combat artificial tax avoidance.

Question 13 – If the Scottish Government introduced a relief, do you believe it should introduce GDO rules for CoACS or do you believe another test could be equally as effective in combating artificial tax avoidance?

63. The UK Government has also introduced a ‘portfolio test’ limiting the application of the relief to transactions where a minimum number of properties and a minimum value of properties are transferred, in order to eliminate the risk of enveloping ( [7] ):

  • for non-residential property, the minimum value is £100 million and the minimum number of properties is ten;
  • for residential property, the minimum value is £100 million and the minimum number of properties is 100; and
  • for funds with a mix of both residential and non-residential properties, a percentage test applies. If the total value of residential property in a portfolio is less than or equal to 10%, then the non-residential requirements must be met. If the total value of residential property in a portfolio is greater than 10%, it is the residential requirements which must be met.

64. In order for the Scottish Government to consider introducing reliefs and given that funds usually hold property on a pan UK basis, we are keen to hear your views on whether a similar portfolio test should be applied in Scotland (based on total property assets across the UK).

Question 14: If the Scottish Government introduced the proposed reliefs, should it introduce general portfolio tests with the same thresholds as the UK (based on the value of pan UK property) or should a more Scottish orientated threshold be used?

Question 15: If the Scottish Government introduced the proposed reliefs, should it legislate for a percentage of ownership test in the same manner as the rest of the UK?

65. The UK has also introduced a mechanism to recover (‘claw back’) from the fund any SDLT that has been relieved, where the fund ceases to qualify as an authorised PAIF or CoACS, including meeting GDO conditions if the portfolio test is not met at any time within 3 years of the end of the seeding period.

66. The UK also recovers the SDLT that has been relieved in proportion to what was originally claimed where:

  • some or all of the units received in consideration for the initial seeding are disposed of within 3 years of the end of the seeding period (a ‘first in, last out’ principle is applied, so that the ‘seeded’ units are treated as the last units to leave a fund on disposal); and
  • a ‘seeded’ property is occupied by a person connected with the fund

67. The Scottish Government is aware from industry representations that some of the anti-avoidance measures above, including the claw back arrangements the UK has put in place, has prevented the sector from using the SLDT seeding relief as was intended.

Question 16: Should the Scottish Government, if introducing the proposed reliefs, implement the same claw back provisions as introduced under the UK’s SDLT regime? If not, what conditions should be applied and how would you suggest recovery of the tax should operate?

68. In terms of liability, the Scottish Government understands that where SDLT is recovered from a PAIF, the fund itself is wholly liable for any tax when the relief is clawed back and is required to make a return of the tax due. Where SDLT is recovered from a CoACS, the scheme operator is liable. This differs from the general rule of these schemes in that the share or unit holders normally have to account for their tax liability from the income they receive from these schemes.

69. The Scottish Government is also concerned that the relief might encourage ‘enveloping’ of residential property within a company structure, where shares are traded to avoid paying LBTT (which would be outside the scope of the tax). Whilst the UK introduced an ‘enveloping tax’ in 2013, this tax is currently reserved and the Scottish Government would not want to encourage enveloping of properties artificially to avoid LBTT.

70. The Scottish Government is also mindful of potential impacts and effects on the residential property market, for example for first time buyers, if large numbers of properties where purchased by large UK and overseas institutional investors for rental purposes.

Question 19: If seeding relief were introduced in Scotland, should it just apply to non-residential property?

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