Understanding Alternative Finance Arrangements under LBTT

Land and Buildings Transaction Tax (LBTT), the Scottish land transaction tax that replaced the Stamp Duty Land Tax (SDLT) for land transactions in Scotland from 1 April 2015, provides special relief for “alternative property finance arrangements”. These arrangements are commonly used for Sharia compliant home purchase schemes that avoid interest, ensuring buyers aren’t penalized by multiple tax charges.

Sharia law prohibits paying or charging interest, so conventional mortgages are not an option for observant buyers. Instead, banks and buyers use alternative contracts (like lease-to-own or profit-sharing sales) that comply with Sharia principles. Without tax relief, such deals could be taxed twice; once when the bank acquires the property and again when it’s transferred to the buyer.

To address this, Schedule 7 to the Land and Buildings Transaction Tax (Scotland) Act 2013 provides relief so that, where its conditions are met, the overall effect is that LBTT is charged only once, in line with a conventional mortgage backed purchase.

LBTT Relief for Alternative Finance

Under LBTT, relief is available for three main types of property finance structures. In each case, the effect is to charge LBTT only on a single, primary transaction bringing the tax in line with what would be due if the buyer had used a standard mortgage. The Revenue Scotland (RS) guidance outlines the three qualifying arrangements:

The aim of the relief is that, where the statutory conditions are met, the arrangements should give rise to no greater LBTT than if the buyer had purchased the property with a conventional mortgage. Below is an explanation of how each arrangement works in practice and how the LBTT relief applies.

Lease-to-Own Arrangement

In a lease-to-own scenario, the bank or financial institution purchases the property upfront on behalf of the client. This initial acquisition by the bank is the first transaction. The bank then leases the property to the client i.e. the homebuyer for a fixed period which is the second transaction and as part of the agreement, the bank promises to transfer the property to the client at the end of the lease term which is the third transaction. Essentially, the client pays rent (often together with an extra saving element) during the lease and ultimately gains ownership when the lease ends.

Under normal rules, each of those steps could trigger LBTT. However, LBTT’s alternative finance relief eliminates tax on the lease grant and the final transfer, so that only one LBTT event is taxed in the whole arrangement. Typically, the LBTT is paid on the first transaction (the bank’s purchase of the property) or whichever step is equated to a normal purchase, and the other steps are relieved from tax. This ensures the total tax paid is the same as if the client had bought the home with a standard mortgage (where there is just one purchase and one tax). The relief also switches off the usual “substantial performance” rules for the final transfer – meaning the mere agreement for future transfer doesn’t count as an early LBTT trigger.

Shared Ownership Arrangement

In a shared ownership arrangement, the buyer and the financial institution purchase the property together as joint owners (tenants in common). For example, the buyer might contribute a 20% deposit, and the financial institution provides 80% of the purchase price. The buyer is granted an exclusive right to occupy the property, even though the bank co-owns it. This occupancy agreement is considered the second transaction in LBTT terms. The buyer then gradually buys out the bank’s share in the property over time, typically by making periodic payments or lump sums that purchase additional slices of the bank’s ownership. Each time the buyer acquires an extra portion of the property from the bank, that is another land transaction (a transfer of a property interest).

This means LBTT is effectively charged only once, upfront on the initial acquisition, aligning with what would happen if the buyer had bought the entire property outright on day one. As with the lease scenario, the law disapplies “substantial performance” rules so that the mere agreement giving the buyer an option or right to acquire the bank’s share over time doesn’t trigger LBTT prematurely. All interim transactions are either exempt or not notifiable, until the buyer eventually owns 100% of the property.

Purchase and Re-Sale Arrangement

For a purchase and resale arrangement, the financial institution acts as an immediate reseller. First, the bank purchases the property from the seller at the market price then the bank sells the property to the buyer at an agreed higher price and on payment terms; this sale to the client is the second transaction. The price difference is essentially the bank’s profit in lieu of interest. The buyer does not pay interest but usually makes a series of installments or a deferred payment to cover the marked-up price. To secure the debt, the buyer grants the bank a standard security over the property. Effectively, the client ends up owning the property from day one (since it’s sold to them immediately) but owes the bank the payment over time under the finance agreement.

This structure involves two back-to-back sales of the property i.e. one from the original seller to the bank, and one from the bank to the ultimate buyer. Normally, two sales would mean two sets of LBTT. In practice, provided the statutory conditions are met, one of the two sales is relieved from LBTT so that, overall, only a single LBTT charge arises.

Conclusion

The alternative finance arrangements under LBTT reflect a practical and fair approach to ensuring that buyers using alternate financing arrangements are not disadvantaged compared to those using conventional mortgages. By ensuring that qualifying lease to own, shared ownership and purchase and resale arrangements do not give rise to more LBTT than a conventional mortgage backed purchase, the legislation avoids double taxation and provides greater certainty for both financial institutions and homebuyers. This relief ensures that individuals can access property ownership without incurring an unfair tax burden.