A new property tax to be introduced in Scotland from 2015 could have an impact on the work of legacy managers and charities which are based in England and Wales or Northern Ireland, but which operate in Scotland.
From April 2015, Stamp Duty Land Tax (SDLT) will no longer apply in Scotland. In terms of the Scotland Act 2012, the Scottish Parliament has the power to set a tax on land transactions from 2015 onwards and is now actively considering draft legislation (the Land and Buildings Transaction Tax (Scotland) Bill) to create a replacement tax – Land and Buildings Transaction Tax, or LBTT for short – on Scottish property purchases.
Why is this new tax important for legacy managers and the charity sector more widely? The reason is in the way charity relief under LBTT is currently framed.
At present, there is charity relief available under the SDLT regime, and the proposal is that charity relief will be given under the new LBTT regime in Scotland too. But the problem arises in the definition of"charity" for these purposes. What the LBTT Bill does is to define"charity" by reference to the Charities and Trustee Investment (Scotland) Act 2005, in other words in terms of the current Scottish charity law. This is a departure from the existing UK-wide tax test which, even for Scottish charities, looks to the English law definition of charity for tax purposes. It is therefore important to look at the practical effect of this Scottish tax definition.
First of all, it is important to stress that charities which are established outside Scotland but who are also registered with the Office of the Scottish Charity Regulator (OSCR) will qualify for tax relief under LBTT as the Bill currently stands. But that does not cover all UK-wide charities, because not every charity which operates UK-wide needs to register with OSCR. Those UK-wide charities which may not be covered by LBTT charity relief include:-
- Charities which own land or buildings in Scotland without actually occupying the land or buildings (in deciding whether a charity"occupies" property, OSCR looks at whether the charity would have been liable to pay Council Tax or Non-Domestic Rates on the property in the absence of charity reliefs);
- Charities which own land or buildings in Scotland as part of an investment portfolio;
- Charities which receive Scottish land or buildings under a gift or legacy, and which then sell the property and buy replacement land or buildings in Scotland using the sale proceeds.
The fact that a number of UK-wide charities may not qualify for relief from LBTT has been drawn to the Scottish Parliament's attention and representations have been made at Committee Stage by various charity sector bodies, but the wording of the Bill continues to exclude non-OSCR registered charities at the time of this article going to press and it is possible that the Bill will not be changed, despite the representations made.
It is important to note that this new tax is not dependent on the outcome of the referendum on independence which is scheduled to take place in Scotland in 2014. This new property tax is to be introduced regardless of the outcome of the independence vote.
The key features of the new Scottish property tax are:-
- It is a"progressive" tax rather than a"slab" tax. This means that tax would be payable on each portion of the value of a property with reference to the rate(s) applying to that portion: it will not be a single rate of tax applying to the whole value.
- Tax rates and thresholds will not be announced until the relevant budget, so it is impossible at this stage to say definitively whether LBTT will lead to higher or lower effective tax rates in particular circumstances.
- Even if the definition of"charity" is amended in the Bill, charity relief from LBTT will not be automatic. Relief may be given at up to 100%, but will still require the completion of an LBTT return. Returns will be made to Revenue Scotland, which is a new tax collecting body in Scotland for taxes devolved to the Scottish Parliament.
It is important to be aware of the introduction of LBTT as a replacement for SDLT in Scotland from April 2015 (only two years away) and the fact that charity relief from LBTT may not cover all UK-wide charities. The LBTT Bill will continue its progress through Holyrood in the spring of 2013 and it is expected to receive Royal Assent this summer.
It would certainly be worth keeping an eye on how the tax provisions develop, especially if your charity falls within the"at risk" group. It is also important to be aware that this possible change to the definition of"charity" for Scottish tax purposes could extend to other taxes devolved to Scotland in future and LBTT may not be the end of the story, regardless of how the current charity relief question is resolved.
This article was published in the Institute of Legacy Management Newsletter. Please note that a subscription is required to view.