AGRICULTURAL tenancies must be exempted from a new land tax which threatens to penalise new entrants by taxing both new lettings and the assignation of existing tenancies.

The Scottish Tenant Farmers Association this week warned the Scottish Government that one of the unintended consequences of the Land and Business Transaction Tax is the impact it will have on the agricultural letting market and the assignation of 1991 tenancies.

LBTT was introduced in April 2015 to replace Stamp Duty Land Tax with, as intended, a simpler and fairer way of levying tax on property sales and other transactions. Under the new arrangement, it is the tenant’s responsibility to make regular LBTT returns if the lease period is for more than seven years, or if the tenant ‘buys’ the lease for more than £40,000; and/or where the accumulated future rent payments is of a high enough level to bring it within the LBTT threshold for leases – £150,000.

STFA Chairman Christopher Nicholson said: “The impact of this land tax on the tenanted sector has only just become apparent now that LBTT is in operation. The new tax regime typically affects leases granted after April 1, 2015, usually 10 year minimum Limited Duration Tenancies, but a 1991 lease being re-granted for tax purposes will also be liable. So tenants should be wary of a landlord’s request for a new 1991 lease to address his tax concerns.

“The new assignation proposals in the Land Reform Act for 1991 tenancies may also be affected," said Mr Nicholson. "As it stands, it is possible that an assignation for value will trigger an LBTT liability. The incoming tenant is, ultimately, paying for an interest in land and therefore, a notification to Revenue Scotland seems likely to be required if the consideration for the assignation is above the £40,000 threshold. He would then be responsible for the return and the LBTT liability and thereafter the three-year returns."

STFA had already seen the assignation of a 1991 tenancy take place where the incoming tenant’s purchase price for the lease created a tax liability on top of the price he has paid for his new tenancy, he said.

“Tenants taking on a long-term LDT will find themselves in even greater difficulty as they will be faced with being taxed on the accumulated rent over the period of the lease," continued Mr Nicholson. “This amounts to penal treatment of the let sector and is obviously not what was originally intended.

"It flies in the face of government policy to encourage longer-term tenancies and the transfer of existing tenancies to new entrants and developing farmers. STFA has already brought this to the attention of the Scottish government and will be seeking the support of fellow stakeholders to lobby for an exemption for the agricultural tenanted sector.

“The potential to grow the tenanted sector as support rules tighten and farming becomes less attractive to landowners in the more marginal areas is one of the of the few silver linings in the Brexit cloud and it would be a spectacular own goal if government tax policy accidentally killed this prospect dead in the water.”