This relief is provided by the provisions of schedule 8 to the LBTT(S)A 2013.
Additional guidance is also available in relation to alternative finance investment bonds relief, covering:
- Rules relating to relief for alternative finance investment bonds where one bond asset is substituted for another – LBTT3022; and
- Circumstances where alternative finance investment bond relief is not available when the bond-holder acquires control of underlying asset – LBTT3023.
Description of relief
To ensure that land transactions funded by means of alternative finance investment bond (AFIB) are not taxed more than once, relief from LBTT is available subject to the satisfaction of certain conditions.
AFIBs include certain Islamic structured financial instruments (referred to as ‘sukuk’) that are compliant with the Shari’a law prohibition on paying or receiving interest.
When an AFIB is used, the property being acquired is transferred by the buyer to a bond-issuer (‘the first transaction’) to be held by the bond-issuer for the purpose of issuing an AFIB until the termination of the bond (no later than 10 years). When the bond is terminated, the ownership of the land reverts (‘the second transaction’). For the purpose of generating income or gains for the bond, the bond-issuer and the original owner enter into a leaseback agreement.
For LBTT, the bond-holder of an AFIB is not treated as having an interest in the bond assets; similarly, the bond-issuer under such a bond is not treated as a trustee of the bonds assets. For the purposes of the relief, the meaning of alternative finance investment bond and interpretation of bond assets, bond holder, bond issuer and capital within LBTT have the same meaning given in section 564G of the Income Tax Act 2007.
Relief not available where the bond-holder acquires control of underlying asset
AFIB relief is not available if control of the underlying asset is acquired by either the bond-holder or a group of connected bond-holders.
A bond-holder or group of connected bond-holders acquires control of the underlying asset if:
- the rights of the bond-holder under an alternative finance investment bond includes the right of management and control of the assets; and
- the bond-holder, or the group, acquires sufficient rights to enable them, or members of the group acting jointly, to exercise the right of management and control of the bond assets to the exclusion of any other bond-holder.
Relief not available if purpose of arrangements is improper
AFIB relief is not available for the first transaction or the second transaction if the arrangements between the buyer and the financial institution referred to in condition A below are not effected for genuine commercial reasons or if they form part of arrangements where the main purpose, or one of the main purposes, of those arrangements is the avoidance of tax.
The relief mechanism
There are seven conditions that apply to the relief:
A. The buyer and the financial institution enter into arrangements where the buyer transfers to the financial institution a qualifying interest in land (the first transaction) and both agree that the financial institution will transfer the interest to the buyer when the consideration is repaid.
A lease of 21 years or less is not a qualifying interest.
B. The financial institution either enters into an AFIB before or after entering into the first transaction and the interest in land is held by the financial institution as a bond asset.
C. To generate income or gains for the AFIB, the financial institution and the buyer enter into a leaseback agreement, or alternative conditions specified by regulations are met. The buyer and financial institution enter into a leaseback agreement if the financial institution grants a lease or sub-lease of the property.
D. Before the end of 120 days beginning with the effective date of the first transaction, the financial institution provides us with the prescribed evidence that a satisfactory standard security has been registered in the Land Register of Scotland.
The security is satisfactory if it is a security ranking first over the property and is in our favour for the total tax payable, including any interest and penalties, which would have been due if relief was not available on the first transaction.
‘Prescribed evidence’ in this context is:
- any document provided by the Keeper of the Registers of Scotland confirming the creation and registration of a standard security in our favour; and
- the Unique Reference Number (URN) for the LBTT return on which relief from the tax was claimed on the transfer of the land from the original owner (the buyer mentioned in condition A) to the bond-issuer. The URN is provided upon submission of the LBTT return.
E. Before the termination of the bond, the total capital payments made to the financial institution is not less than 60% of the value of the interest in the land at the time of the first transaction.
F. The financial institution holds the interest in land as a bond until the termination of that bond.
G. Once the interest in land ceases to be held by the financial institution as a bond asset, the interest is transferred to the buyer within 30 days (the second transaction). The second transaction must also be effected within 10 years (or another period specified by regulations) of the first transaction.
The relief: first transaction
The relief can be claimed for the first transaction if it relates to an interest in land in Scotland and conditions A to C above are met within 30 days of the effective date.
Withdrawal of relief
The relief is withdrawn if the interest held by the financial institution is transferred to the buyer without conditions E and F being met, or these conditions are not met within 10 years (or another period specified by regulations) of the first transaction. The relief is also withdrawn if condition D is not met or it becomes apparent that for any reason conditions E to G cannot or will not be met.
Amount of tax chargeable where the relief is withdrawn.
Where the relief is withdrawn, the amount of tax chargeable is based on the chargeable consideration of the first transaction (but for the relief).
The chargeable consideration for that transaction is the amount of tax that would have been chargeable based on the market value of the subject-matter in the transaction or, if the acquisition was the grant of a lease, the rent.
The relief: second transaction
The relief can be claimed for the second transaction if all the conditions are met and the relief was claimed and accepted for the first transaction.
Discharge of security when conditions for relief are met.
If after the effective date of the second transaction the financial institution provides us with the appropriate evidence that conditions A to C and E to G have been met, we must register a discharge of security within 30 days in the Land Register of Scotland.
Where security is discharged as above, we must register a discharge of security within 30 days of the bond-issuer providing the appropriate evidence. The discharge must be registered in the Land Register of Scotland.
‘Prescribed evidence’ in this context is:
- a statement from the bond-issuer, or a person authorised to act on behalf of the bond-issuer, that all of conditions A to C and E to G in Part 3 of schedule 8 have been met;
- the Unique Reference Number (URN) for the LBTT return in which relief from the tax was claimed on the transfer of the land from the original owner to the bond-issuer;
- the URN for the LBTT land transaction return in which relief from the tax was claimed on the transfer of the land from the bond-issuer to the original owner; and
- any document as provided by the Keeper of the Registers of Scotland confirming that the land has been registered in the name of the original owner.
The URN is provided upon submission of the LBTT return. The ‘original owner’ in this context is the buyer mentioned in condition A.
Claiming the relief
To claim this relief see the guidance on 'How to make a LBTT return and pay tax' which is available separately on our website.