Land and buildings transaction tax - property investment funds: consultation

Chapter 1: Introduction

Purpose

1. The purpose of this consultation is to gather views from the property sector, managers of and investors in Property Authorised Investment Funds ( PAIFs) – (a type of Open Ended Investment Company ( OEIC)), Co ownership Authorised Contractual Schemes ( CoACSs) and other interested stakeholders on the potential introduction of a relief from Land and Buildings Transaction Tax ( LBTT) for the transfer of properties into such schemes under certain specified circumstances.

2. The Scottish Government is committed to ensuring that Scotland remains an attractive location for investment. Scotland can offer investors a stable and respected legal system and a well-developed financial system. Scotland is recognised internationally for its excellent higher and further education system and its highly skilled workforce. Investors benefit from good global accessibility, long term experience of supporting inward investment activity and competitive property yields.

3. In July 2015, the Scottish Government consulted on a relief from LBTT for properties held by Authorised Unit Trusts ( AUTs) converting or amalgamating with an Open Ended Investment Company. Scottish Ministers laid The Land and Buildings Transaction Tax (Open-ended Investment Companies) (Scotland) Regulations 2015 in the Scottish Parliament (which took effect from 6th October 2015) introducing an exemption, by way of a claimable relief. Seeding in this consultation means the initial transfer of property or an existing property portfolio into a new or empty fund.

4. The Scottish Government is now consulting on proposals to introduce a wider LBTT relief for seeding PAIFs and CoACS from sources other than an Authorised Unit Trust ( AUT) whilst also considering providing LBTT parity between CoACS and PAIFs.

5. The Scottish Government is keen to hear views on the treatment of CoACS under LBTT. Stakeholders have asked for changes to be introduced so that an LBTT charge does not arise when there is a transaction in units. These changes would provide parity in this area between LBTT in Scotland and Stamp Duty Land Tax ( SDLT) in England and Northern Ireland.

6. Reliefs in these areas are currently in place for UK Stamp Duty Land Tax, introduced through Finance Act 2016. The Scottish Government’s aim is to understand the impact that introducing similar arrangements (or keeping the status quo) would have on Scotland’s economy, the asset management sector and broader property sector. In addition, this consultation is intended to ensure that the introduction of any relief would be consistent with the Scottish approach to taxation.

Background

7. LBTT, which replaced UK Stamp Duty Land Tax ( SDLT) in Scotland from 1 April 2015, is a tax applied to residential and non-residential land and buildings transactions (including non-residential leases) where there is an acquisition of a chargeable interest. The legal underpinning of the tax is contained in the Land and Buildings Transaction Tax (Scotland) Act 2013 (‘the Act’) which also came into force with effect from 1 April 2015.

8. LBTT legislation has strengthened provisions (over its predecessor SDLT) in a number of areas, better aligning the legislation with Scots law and practices and ensuring that appropriate reliefs and exemptions are available only when strong evidence supports the need for them. Scottish Ministers have also made clear that they wish to take all reasonable steps to reduce the risk of artificial avoidance of the devolved taxes, to foster a climate of tax compliance and thus help to safeguard public finances.

9. In its paper SDLT Rules for Property Investment Funds( ^[1] ), the UK Government recognised that the way in which SDLT was applied to certain collective investment schemes was perceived by the industry as presenting barriers to their effective use as property funds. At the 2014 UK Budget, the UK Government announced that it would consult on how PAIFs and CoACSs should be treated for SDLT purposes.

10. Following this, the Finance Act 2016 introduced relief provisions, updating the SDLT legislation contained in the Finance Act 2003 with the effect that properties could be seeded into a PAIF or CoACS without an SDLT charge.

11. Since LBTT became operational in 2015, several stakeholders, including those in the investment management sector, law and accountancy firms have raised concerns about:

• the impact of the LBTT charge on the conversion to, or seeding of, PAIFs and CoACS where these investment vehicles hold property in Scotland; and
• concern over the impacts of not having parity with SDLT on the treatment of CoACS.

12. The Scottish Government is now interested to hear views on whether it should introduce a 100% relief for the ‘seeding’ of properties into an authorised PAIF or CoACS and legislate to provide parity between PAIFs and CoACS to allow for CoACS unit trading without a LBTT charge.