Property Development Finance in Scotland: How It Works

Development finance is the core loan for a build, but Scottish developers usually combine it with other types of property finance over the life of a project. Each product has a different job, and choosing the right one at each stage keeps the cost of funding down and your options flexible. The legal and tax differences in the rest of this guide apply to all of them.

Bridging loans are short-term loans, usually for 1 to 24 months, advanced in a single sum against the current value of a property. Scottish developers use bridging finance to buy a site before planning is granted, to complete an auction purchase quickly (auction finance), to fund a light renovation before a sale or refinance, or to release capital from another investment property while a development loan is arranged. Bridging finance is typically priced monthly, from around 0.55% per month, with rolled-up interest and no monthly repayments. Most bridging loans take a first charge, but second charge bridging loans behind an existing lender are possible on investment and commercial property with that lender's consent. Our guide to bridging finance in Scotland covers rates, eligibility and the process in detail, and our bridging loans service explains how we arrange them.

Where senior development finance and your own cash do not cover the full cost, mezzanine finance can sit behind the senior lender with a second-ranking standard security, taking total borrowing towards 85% to 90% of costs. Because it ranks behind the senior lender, much like a second charge in England, mezzanine finance is typically priced at around 12% to 15% p.a., sometimes with a profit share, and needs the senior lender's agreement through an intercreditor deed. The alternative is a joint venture, where an equity partner funds part or all of the developer's contribution in return for a share of the profit. Our mezzanine finance and equity and joint venture services cover both.

When a scheme reaches completion, developers who are still selling units can refinance onto development exit finance, which is usually cheaper than the development loan and gives time to sell. Developers who plan to keep the finished property refinance onto longer-term mortgages instead: buy-to-let mortgages for residential units held in a company, or commercial mortgages for commercial, mixed-use and some larger residential investment property. Commercial mortgages are term loans, typically over 5 to 25 years, with monthly repayments of interest or capital and interest, sized against rental income as well as value. Lenders offering development finance will want to see that a refinance onto commercial mortgages is realistic before they lend, so it pays to test the numbers early.

Each of these is unregulated business-purpose borrowing when taken by a company against property it does not live in. A bridging loan, second charge loan or mortgage secured on a home that you or a close family member lives in is regulated by the Financial Conduct Authority (FCA) and must be arranged by an FCA-authorised adviser.

Scotland has a separate legal system, and property transactions follow a different process and vocabulary. For a development lender, the differences sit in three places: how the purchase contract is formed, what form the security takes, and where it is registered.

In practice this means the lender must instruct solicitors qualified in Scots law, either a Scottish firm or a UK firm with a Scottish practice, and the borrower needs a Scottish solicitor too. Title reports, the standard security, any assignation of building contracts and warranties, and the registration process all follow Scottish procedure. Some lenders with limited Scottish volumes use panel firms they know well, which can affect both timing and legal costs, so it is worth knowing a lender's arrangements before you commit to them.

One practical point: missives often conclude close to settlement, and development sites are frequently bought on missives with suspensive conditions, such as the grant of satisfactory planning permission. Lenders will want to see the conditions, the long-stop date and the price mechanism before they commit, so bring your solicitor and broker together early.

Stamp Duty Land Tax does not apply in Scotland. Land purchases are taxed under Land and Buildings Transaction Tax (LBTT), administered by Revenue Scotland, with separate rates and bands for residential and non-residential property. Bare development land and commercial buildings are generally taxed at non-residential rates, while the purchase of existing dwellings is taxed at residential rates.

The Additional Dwelling Supplement (ADS) is the Scottish equivalent of the English higher-rates surcharge, with an important difference: it is charged at a flat percentage on the whole purchase price rather than band by band. It applies to most purchases of dwellings by companies, so a developer buying houses to convert or demolish through an SPV should expect to pay it. ADS has increased in recent years, so check the current rate with Revenue Scotland or your solicitor rather than relying on older figures.

LBTT and ADS are part of your total costs, so they affect both your equity requirement and your loan to cost ratio. Most lenders do not fund transaction tax, so it normally comes from your own cash at settlement. The rules around mixed-use property, multiple dwellings and reliefs differ from the English regime and change at Scottish fiscal events, so take specialist advice from a Scottish solicitor or tax adviser before you finalise your appraisal or agree a price.

Scotland's planning system is governed by its own legislation, including the Planning (Scotland) Act 2019, and national policy is set by National Planning Framework 4 (NPF4), which forms part of the statutory development plan alongside each council's local development plan. A project's planning prospects therefore depend on how it fits both NPF4 and the relevant local development plan, and lenders will ask how any consent relates to them.

Several terms differ from England. The equivalent of outline consent is planning permission in principle, with the details approved later through applications for approval of matters specified in conditions. Planning obligations are secured through section 75 agreements rather than section 106, and the Community Infrastructure Levy does not apply in Scotland. Permitted development rights are also set separately, so English change-of-use routes such as office-to-residential prior approval do not carry across.

Appeals are handled differently too. Where a council refuses a major or national development, or does not decide it in time, the appeal goes to the Scottish Government's Planning and Environmental Appeals Division, where a reporter appointed by Scottish Ministers decides it. Many smaller applications decided by council officers under delegated powers are instead reviewed by the council's own local review body. For funding, the same rule applies as in England: most senior lenders want full planning permission (or matters specified in conditions approved) before they fund the build, and sites without consent are usually bought with bridging finance or equity. Our guide to planning permission and development finance explains how consent status affects terms.

In England, building regulations approval can run alongside the build. In Scotland, a building warrant must be granted by the local authority verifier before construction or conversion work starts, and at the end a completion certificate must be submitted and accepted before a new building can be occupied, unless temporary occupation is permitted. Building standards in Scotland also differ in places from the English regulations, including energy and heating requirements for new homes and fire safety provisions for flats, which can affect build costs.

Lenders treat both documents as critical. A granted building warrant, or clear evidence it will be granted, is usually a condition before build drawdowns begin, because work started without one is unlawful and can affect the security. Acceptance of the completion certificate, along with the new-home warranty, is typically required before units can be sold or refinanced, so it is the practical trigger for your exit. Warrant processing times vary between councils, so build a realistic allowance into your programme.

The Scottish development lending market is smaller than England's. Some specialist lenders do not lend in Scotland at all because of the legal differences and the cost of maintaining Scottish legal panels, while others lend actively but with more selective criteria. Scottish clearing banks and a number of UK-wide challenger banks and specialist lenders remain active, but the choice is narrower, which makes it more important to approach lenders whose criteria genuinely fit the project.

Across all of these markets, lenders underwrite rental and build-to-rent exits carefully because the private rented sector in Scotland is regulated differently from England and the policy framework has been changing. If your exit relies on letting or refinancing onto a term loan, expect lenders to test the rental assumptions conservatively. Our local pages for Edinburgh and Glasgow cover those markets in more detail.

For illustration, consider a developer planning eight flats on a brownfield site in a Scottish city, with full planning permission and a granted building warrant. The expected GDV is £2,400,000. The senior lender offers up to 65% LTGDV and up to 85% of costs, excluding sales costs.

The Scottish-specific lines are small individually but add up: LBTT, building warrant fees, the section 75 contribution and Scottish legal costs on both sides. If the site had included existing dwellings bought by a company, ADS would have added significantly to the equity required. To see how much funding your own project could support, our development finance calculator and development appraisal calculator will run the same test on your own figures.

We are an independent broker, not a lender, working with a panel of 100+ lenders across the UK. For Scottish schemes the first job is simple but important: identifying which lenders actively fund in Scotland, for this type and size of project, with legal panels that can complete on Scottish timescales. We then review your appraisal with Scottish cost lines in place, present indicative terms side by side and manage the valuation, monitoring surveyor and legal process through to the first drawdown.

Development finance to a company for a business purpose is unregulated. If any lender asks for security over a home that you or a close family member lives in, that element is a regulated mortgage contract: Construction Capital is not authorised by the FCA, so it must be referred to an FCA-authorised adviser. To discuss a Scottish development project, read about our development finance service or submit your deal and we will come back with a view on lender appetite, leverage and pricing.