Land and Buildings Transaction Tax - property investment funds: consultation

Part 3 - Seeding relief – A Call for Evidence and Views

General availability of relief

1. Following changes made through the UK Finance Act 2016, a relief from SDLT is available where properties 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. The Co-ownership Contractual Schemes (Tax) Regulations 2025 extends this relief to RIFs by amending s65A of FA03.

2. The Scottish Government previously consulted on the case for introducing seeding relief on the transfer of property into PAIFs and CoACS in May 2018. Following that consultation, a commitment was made to bring forward draft legislation on seeding relief following that consultation. Due to various factors including issues relating to EU withdrawal, this legislation was not however subsequently brought forward.

3. We are aware that stakeholders remain supportive of seeding relief under LBTT. While responses to the May 2018 consultation are informative, the UK investment landscape has changed in the intervening period. In order to ensure our evidence base for change reflects the current landscape, the Scottish Government is seeking views on the proposition of providing parity with SDLT in terms of a seeding relief for PAIFs, CoACS and RIFs.

4. The term ‘seeding’ refers in this context 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 relevant vehicle). A fund will also require a seeding period to build up a track record of performance in order to attract new investors.

5. The UK Government rationale for this SDLT 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.

6. 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.

7. Seeding relief under SDLT requires that the following conditions must be met:

(i) The purchaser of the new properties must be a RIF, PAIF or CoACS;

(ii) The subject matter of the seeding transaction must be one or more interests of land;

(iii) The only consideration for the transaction is for the vendor to issue units in the RIF or CoACS or shares in the PAIF; and

(iv) 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.

8. For the purposes of SDLT, the seeding period begins on the date that the first property is seeded and ends either on the date that the first investor invests or 18 months after the first property seeding date – whichever is shorter.

9. This extended relief 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 discussed in paragraphs 21 to 26 below.

10. 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.

11. 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, CoACS or RIF. However, any Scottish property transferred in would be subject to an LBTT charge. For completeness, there is currently no seeding relief available under Land Transaction Tax arrangements in Wales.

12. From stakeholder engagement to date, the Scottish Government understands that this LBTT position means that there may be little appetite for these transfers, particularly given that the percentage of Scottish properties held will be relatively low when compared to the overall portfolio makeup.

13. While specific evidence has been relatively limited to date, anecdotally it has been 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.

14. 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 these vehicles.

15. Once divested, there is a potential 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.

16. By contrast, if Scottish properties could be seeded into these investment vehicles, the stakeholders that have engaged with the Scottish Government to date have indicated that investors would wish to maintain a broadly consistent Scottish holding in future. Thus, as the investment vehicle grows in size, so too would its investment in Scotland.

17. 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).

18. Whilst stakeholders have suggested that parity with SDLT would make the administration of these funds more straightforward to manage, providing parity on PAIFs, CoACS and RIFs would also increase the complexity of LBTT itself and could open up opportunities for artificial tax avoidance. There is also, in the short term, the potential for a negative financial impact to arise on the basis that – absent seeding relief – properties will be divested from funds, thus generating LBTT revenue from the sale of the divested property.

19. In order to safeguard public finances, we are accordingly also seek views on any negative impacts associated with providing parity with SDLT in this area, including the anti-avoidance and claw back provisions discussed in paragraphs 21 to 26.

20. 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.

Q11 Should seeding relief be introduced under LBTT? Please set out further commentary on the basis of your response.

Q12 If yes, should the relief replicate that in place under SDLT?

Q13 Are there any aspects of the SDLT framework which would need to be amended if equivalent LBTT arrangements were introduced?

Q14 Are there any alternative approaches that the Scottish Government should consider?

Q15 What would the impact be on investment in Scottish property if equivalent LBTT arrangements were not introduced?

Q16 Should the Scottish Government consider bespoke seeding arrangements for any of the investment vehicles discussed in this consultation?

Withdrawal of relief in certain circumstances

21. Part 1, Schedule 7A of Finance Act 2003 sets out the application of SDLT seeding relief to PAIFs, alongside restrictions on availability and scenarios where relief may be withdrawn. Part 2 sets out similar in respect of co-ownership contractual schemes (CoACS and RIFs).

22. While the SDLT seeding relief framework is broadly consistent for all vehicle types, there are some key differences which have been highlighted below.

23. A key condition is that SDLT relief may be recovered where the fund ceases to qualify as an authorised PAIF, CoACS or RIF including meeting Genuine Diversity of Ownership (GDO) conditions if the portfolio test is not met at any time within 3 years of the end of the seeding period.

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

a. 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

b. a ‘seeded’ property is occupied by a person connected with the fund.

25. 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.

26. Where SDLT is recovered from a CoACS or RIF, 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.

Q17 - If seeding relief is introduced in Scotland, should a different approach be taken to withdrawal of relief?