The Scottish Government has published an evaluation of parts of Land and Buildings Transaction Tax (“LBTT”) policy alongside the Scottish Budget 2025–26. It considers whether the rules still work as intended and where changes could be explored in the next parliamentary term.
The Scottish Government and a Working Group of tax professionals focused on three areas including the vexatious issue of the LBTT rules for non-residential leases.
The non-residential lease review regime under scrutiny
Under LBTT, notifiable non-residential leases require an updated LBTT return to be submitted every three years from the effective date. The aim is to increase certainty by revisiting the lease valuation and projected rents.
Revenue Scotland advised that the review regime has been difficult to run, with around 36% of three yearly review returns still not filed. Reported reasons include low awareness, a view that penalties may be cheaper than any tax due, and low confidence in filing without support. We also encounter many businesses unaware of these three yearly obligations.
Working Group discussions and Revenue Scotland data suggest the current approach can be complex and disproportionately burdensome for small tenants and low value leases. This can lead to missed returns, penalties and interest. With 75% of submitted lease reviews producing no change in tax, many felt the position is unfair.
Concerns were also raised around lease review penalties which account for 67.1% of total late filing penalties issued by Revenue Scotland, with this figure rising to approximately 82% between April 2024 and July 2025. This raised concerns about proportionality in terms of the application of penalties, especially where no tax is due, and whether daily penalties are having the appropriate behavioural impact.
A range of options were discussed that could address these concerns, including changes to thresholds and the introduction of tax payer differentiated systems, event based triggers or simplified declarations or mirroring the five year rent review or break notice cycles. These would require further and more detailed consideration.
Mandatory nil returns were seen as unnecessary, especially where no tax is due; the preferred option was to remove them. We would welcome this, having seen clients incur significant penalties for late three yearly LBTT returns where no additional tax was payable. We also support event based returns, which could prompt compliance by building filing into transaction mechanics.
What's next?
The findings will inform Scottish Ministers’ consideration of these issues in the next Scottish Parliament session. The report does not set out specific reforms; it explains the issues so they can be examined in more detail, and so Ministers can decide whether and how to take reforms forward.
For businesses and individuals affected by LBTT this review signals potential reforms that could reduce administrative burdens and make penalties fairer. We would welcome improvements to the current system and will continue to monitor developments during the next Scottish parliamentary term.
Should you have any queries arising from the above or require LBTT advice please do not hesitate to contact Zita Dempsey or Caroline Colliston.
Thank you to William McGoldrick for his contribution to this article.
