LBTT Review in Scotland: Five Areas Property Buyers and Investors Should Monitor in 2026

More than a decade after Scotland introduced Land and Buildings Transaction Tax (LBTT), the Scottish Government has carried out its most detailed review of the regime so far. The 2025 to 2026 policy evaluation looked at three practical areas: non-residential leases, the Additional Dwelling Supplement (ADS) in difficult or exceptional circumstances, and whether a new relief should be introduced for certain Community Right to Buy transactions.

Alongside that work, the Scottish Government commissioned independent research from Alma Economics. That research considered five wider features of the LBTT framework: non-residential and mixed-use property, Multiple Dwellings Relief (MDR), the six-or-more dwellings ADS exemption, first-time buyer relief, and whether LBTT supports Scotland's Net Zero and Just Transition objectives. The reports were published on 25 March 2026. They do not change the law. The Scottish Budget 2026 to 2027 also confirmed that current LBTT rates and bands will be maintained.

However, the reports are important because they identify where the system is under strain and where future reform may be considered in the next Scottish parliamentary session. For property investors, developers, landlords, tenants, the practical message is simple. The current rules still apply, but several areas of LBTT now have a clear reform agenda. Transactions being planned in 2026 should therefore be reviewed not only against the law as it stands, but also against the risk of future change.

1. Non-Residential Leases & the Three-Year Review Regime

One of LBTT's most distinctive features is the three-year lease review regime for non-residential leases. Under Schedule 19 of the Land and Buildings Transaction Tax (Scotland) Act 2013 (the “Act”), whenever a notifiable non-residential lease is granted or first comes into scope of LBTT, the tenant must file an initial LBTT return and pay tax based on the Net Present Value (NPV) of the rent expected over the life of the lease. The NPV calculation uses a prescribed discount rate to bring future rent payments back to a present-day value; LBTT is then charged on that NPV using the non-residential rates and bands.

That initial filing is not the end of the matter. Every three years from the effective date of the lease, the tenant is required to submit a further LBTT return recalculating the NPV using actual rent paid during that period. The purpose is sound in principle. If actual rents turn out to be higher than originally estimated, further tax is due; if they are lower, a refund may arise. Revenue Scotland's guidance at LBTT6007 sets out the detailed rules for completing three-year review returns, and the same obligation arises on assignment or termination of the lease.

What the Review Found

The review's findings on the lease regime were striking. Revenue Scotland data shows that approximately 36% of three-year review returns are never filed at all. The reasons cited include low awareness of the obligation, a perception that penalties may be cheaper than any additional tax due, and even payment of penalty but still not completed the required filing. These numbers point to a systemic problem that goes beyond individual non-compliance.

More damaging still is the statistic that around 75% of submitted lease review returns produce no change in the tax due. In other words, three quarters of the administrative effort both by tenants and by Revenue Scotland results in a nil adjustment. Yet the current rules require tenants to file a return regardless of whether any tax is owing. The working group found that mandatory nil returns create unnecessary burden, particularly for small tenants and low-value leases where the administrative cost of compliance can outweigh the tax at stake.

The penalty position has attracted particular criticism. Lease review penalties accounted for approximately 67% of all late-filing penalties issued by Revenue Scotland, rising to around 82% between April 2024 and July 2025. Daily penalties can accumulate rapidly, and there are documented cases of businesses incurring significant penalties for late three-year returns where no additional tax was due at all. The review found that this outcome raised serious questions about proportionality one of the five core principles in the Scottish Government's Framework for Tax.

2. The Additional Dwelling Supplement and Exceptional Circumstances

The ADS is an additional LBTT charge on purchases of relevant Scottish residential property. It applies at a flat rate of 8% of the relevant consideration for transactions entered into on or after 5 December 2024. The charge usually applies where a buyer, or any buyer in a joint purchase, acquires a dwelling for £40,000 or more and owns, or is treated as owning, another dwelling anywhere in the world, unless the buyer is replacing their only or main residence or another exception applies.

For transactions with an effective date on or after 1 April 2024, the main residence replacement rules use a 36-month period rather than the previous 18-month period. Broadly, ADS may be avoided or reclaimed where the buyer disposes of a previous only or main residence within the required period and occupies the new property as their only or main residence. There are also important rules for joint buyers, inherited property, small shares in property, divorce and separation.

The Gap Identified by the Review

The review considered cases where the statutory ADS rules can produce harsh results. These include property-related barriers to sale, such as cladding defects or reinforced autoclaved aerated concrete (RAAC), and personal circumstances such as serious illness, bereavement, disability-related needs or domestic abuse. The working group drew a useful distinction between group-based events and individual circumstances. Group-based events, such as cladding or RAAC issues, may be easier to define in legislation. Individual circumstances are harder because Revenue Scotland would need to assess sensitive evidence and apply discretion consistently.

3. A Potential Community Right to Buy Relief

Section C of the Scottish Government's 2025 to 2026 policy evaluation explored whether LBTT should be reformed to support purchases made under Scotland's Community Right to Buy framework. This issue entered the review following consideration of an amendment submitted to the Land Reform (Scotland) Bill, reflecting the Scottish Government's broader commitment to land reform and community empowerment. Community Right to Buy rules can allow eligible community bodies to acquire land in the public interest. However, community purchases can be complex and expensive. LBTT may be a material cost where a community body is relying on grant funding, community fundraising or short-term finance.

The review accepted that a relief could remove a fiscal barrier to community acquisition and could align Part 2 Community Right to Buy with the existing LBTT relief for Crofting Community Right to Buy transactions. It also noted that the revenue cost is expected to be low because the number of qualifying transactions has historically been small. However, the Scottish Government concluded that it would be premature to amend LBTT now. The wider Community Right to Buy framework is itself under review, and the Government considered that any LBTT relief should be considered once the future shape of that framework is clearer.

4. Multiple Dwellings Relief

Multiple Dwellings Relief (MDR) is a partial relief from LBTT available under Schedule 5 of the Act whenever a buyer acquires more than one dwelling in a single transaction or in a series of linked transactions. The logic behind MDR is straightforward and important: without it, a bulk purchase of residential property would be assessed as a single transaction, pushing the entire consideration into the highest rate bands and producing a higher effective tax rate than if each property had been purchased separately. MDR corrects this by averaging the consideration across the number of dwellings being purchased and applying standard LBTT rates to that average figure, ensuring that the buyer is not penalised for transacting efficiently.

Scotland has retained MDR, while MDR was abolished in England and Northern Ireland from 1 June 2024. The independent LBTT review found that MDR represented between 7% and 15% of total LBTT revenues forgone over the period considered, and between 1% and 3% of total LBTT revenue. It also found limited evidence of misuse in Scotland compared with concerns that had arisen under SDLT.

Stakeholders generally opposed removing MDR. They argued that it supports large-scale housing investment, build-to-rent schemes and development viability. Some suggested that the relief could be redesigned to support particular policy outcomes, such as affordable housing or retrofit commitments, but no firm legislative proposal has been adopted. MDR remains valuable, but claims should be carefully supported. Buyers should confirm that each unit is a dwelling for LBTT purposes, that linked transaction rules have been considered, that the allocation of consideration is just and reasonable, and that any ADS interaction has been calculated correctly. A weak MDR claim may attract scrutiny, especially if future policy debate focuses on revenue cost or perceived avoidance.

5. The Six-or-More Dwellings Exemption, Mixed-Use Property and Net Zero Alignment

The Six-or-More Dwellings ADS Exemption

Under Section 59(8) of the Act, where six or more separate dwellings are the subject of a single transaction, the entire transaction is treated as non-residential for LBTT purposes. This has two immediate consequences: LBTT is calculated using the lower non-residential rate bands and no ADS is payable on the transaction at all. This is a powerful exemption for institutional-scale purchasers.

The exemption applies even where the portfolio includes a non-residential element so a buyer acquiring eight flats and two ground-floor commercial units in a single transaction qualifies for the exemption on both the residential and non-residential parts, since the ADS does not apply to non-residential property in any event. The exemption accounted for approximately 3% to 7% of total LBTT foregone revenue since 2018/19 according to Revenue Scotland data, a figure broadly comparable to first-time buyer relief.

Mixed-Use Property

Mixed-use property is another area to watch. Under the current LBTT framework, a transaction that includes both residential and non-residential property is generally taxed at non-residential rates. This can be valuable for farms, rural estates, shops with flats above, guesthouses, pubs with accommodation and other mixed assets. The independent review found significant uncertainty around the boundary between residential and non-residential property. Legal professionals reported spending considerable time on classification questions, and stakeholders supported exploring an apportionment approach. Under that approach, the residential part would be taxed at residential rates and the non-residential part at non-residential rates. If Scotland moved to apportionment, the tax cost of some mixed-use acquisitions could increase, particularly where a valuable residential element currently benefits from non-residential rates.

Net Zero Alignment

The fifth strand of the Alma Economics review was perhaps the most forward-looking. An assessment of how LBTT interacts with Scotland's commitment to achieving Net Zero greenhouse gas emissions by 2045 and the related Just Transition agenda. As of 2025, LBTT is not explicitly tied to climate or energy efficiency objectives. Tax is calculated purely on the price and type of the property there is no incentive to purchase a more energy-efficient building, no relief for properties that meet a higher environmental standard, and no penalty for acquiring a high-emission asset.

The review found that several LBTT features have incidental environmental effects, positive and negative, without any deliberate policy design. The ADS, by taxing second homes and investment properties heavily, may promote fuller year-round occupancy and reduce pressure to build additional dwellings outcomes with a potential carbon benefit. MDR, by facilitating portfolio acquisitions, may make it easier for a single owner to fund systematic retrofitting of a block of properties, since a unified ownership structure is more conducive to whole-building upgrades than fragmented individual ownership. But MDR has no direct link to energy performance: the relief is available whether or not the buyer plans to improve the properties' energy efficiency.

Stakeholders were broadly supportive of LBTT playing a role in Scotland's Net Zero transition but viewed it as part of a broader toolkit rather than the primary mechanism for encouraging decarbonisation. Suggestions included conditioning first-time buyer relief on the purchase of more energy-efficient properties or linking MDR to a commitment to carry out retrofitting works. However, the review did not recommend specific legislative changes in this area, noting that the design of effective and equitable environmental incentives within a transaction tax is complex and risks unjust outcomes if appropriate financial support is not provided alongside any obligations imposed on buyers.

Conclusion

The 2025 to 2026 LBTT review has not produced immediate change. The Scottish Budget 2026 to 2027 held all rates and bands at current levels, and the incoming parliament will need to digest the review findings, form its own policy positions and take any necessary legislation through Holyrood before change becomes effective. But the review has done something equally important: it has set out, with unusual clarity, where the system is under strain and where the political and stakeholder appetite for reform lies.

Disclaimer

This article is intended for general information only. It does not constitute legal, tax or financial advice. The legal position depends on the facts of each transaction and on the legislation in force at the relevant effective date. LBTT legislation and Revenue Scotland guidance should be checked before any transaction is completed, and specialist advice should be taken where appropriate.