Land and Buildings Transaction Tax - property investment funds: consultation

Part 4 - Addressing Tax Avoidance Risks

General

1. To limit opportunities for artificial tax avoidance, the Scottish approach to taxation ensures that reliefs and exemptions are only introduced where there is strong supporting evidence and alignment with established tax principles.

2. Scottish Ministers have adopted a straightforward yet robust strategy to address artificial tax avoidance in devolved taxes. The Scottish General Anti-Avoidance Rule (GAAR), as set out in the Revenue Scotland and Tax Powers Act 2014 (RSTPA), empowers Revenue Scotland to take countermeasures against tax arrangements deemed artificial.

3. Section 64 of the RSTPA outlines two distinct tests for determining 'artificiality'. One test evaluates whether an arrangement aligns with the intended principles and policy goals of the legislation (such as exploiting legislative gaps), the other assesses whether the arrangement lacks genuine economic or commercial substance.

4. In respect of the proposed legislation on CoACS and potential new reliefs for RIFs and seeded properties, GAAR provisions would serve to deter and address potential misuse. In line with the SDLT model, the Scottish Government would also consider implementing more targeted measures to safeguard public revenue.

Co-ownership Authorised Contractual Schemes

5. The proposed approach to providing a relief for the exchange in CoACS units is to treat the scheme as a company, and units as shares. The draft legislation provides that treating the scheme as a company does not entitle them to Group relief, Reconstruction relief or Acquisition relief. The Scottish Government is keen to understand whether the draft legislation should similarly restrict availability of other LBTT reliefs and exemptions in a similar manner.

Q18 – Are amendments required to the draft legislation to ensure the exemption does not go beyond its’ intended scope – i.e. solely exempting the exchange of units within the scheme?

Reserved Investor Funds

6. While not traditional authorised funds, the UK Governments RIF tax framework is designed to include safeguards to minimise tax avoidance as set out in the Co-ownership Contractual Schemes (Tax) Regulations 2025.

7. Should the Scottish Government introduce an equivalent framework for LBTT purposes, it is likely that safeguards will mirror those in place for SDLT in the first instance.

Q19 If equivalent RIF arrangements are introduced under LBTT, is it appropriate to mirror the current SDLT safeguards?

Q20 Should any specific or bespoke provisions be considered for LBTT?

Seeding relief

8. The Scottish Government is concerned that the availability of seeding 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).

9. Whilst the UK introduced the Annual Tax on Enveloped Dwellings in 2013, this tax is currently reserved and the Scottish Government would not want to encourage enveloping of properties artificially to avoid LBTT.

10. 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 institutional investors for rental purposes.

Q21 In order to prevent artificial enveloping of properties, should the Scottish Government consider providing for seeding relief in respect of non-residential property only?

Q22 Are there any other avoidance risks the Scottish Government should consider in respect of seeding relief?