HMRC SDLT: SDLTM16005 – Reliefs and Exemptions: Rent overlap in case of further lease

Reliefs and Exemptions: Rent Overlap in Case of Further Lease

This section of the HMRC internal manual provides guidance on reliefs and exemptions related to rent overlaps when a further lease is taken. It explains the principles and concepts involved in managing such overlaps.

• Details the conditions under which reliefs can be claimed.
• Explains the process for calculating rent overlaps.
• Outlines the documentation required for claiming exemptions.
• Provides examples to illustrate the application of these rules.

SDLT and Rent Overlap Relief

When renting a property in the UK, you may face a situation where two leases overlap—this is often referred to as ‘rent overlap.’ This can occur when you take out a new lease before your current lease ends. The stamp duty land tax (SDLT) regulations provide relief in these cases to prevent you from being taxed on overlapping rental periods unfairly.

What is Rent Overlap?

Rent overlap occurs when you pay rent for two properties during a period of time because your existing tenancy has not yet finished when your new lease starts. SDLT can apply to these circumstances, and understanding this can save you money.

The key idea here is that if you are paying rent for two leases at the same time, you should not be financially penalised as a result. The Government allows for “overlap relief” to manage this issue.

Understanding Overlap Relief

Overlap relief is designed to ensure you are not taxed on the same rental payment twice. Here’s how it generally works:

• If your leases overlap, you only pay SDLT on the rent effectively due once the first lease ends.
• You need to calculate the amount of rent and the period where both leases are active to determine how much to claim as relief.

Taking Rent into Account for Overlap Relief

To calculate the amount of rent that qualifies for overlap relief, you need to consider the total rent paid across both leases during the overlapping period. Here’s how to do it:

• Identify the rental amounts for both leases.
• Determine the periods where both leases are active.
• Calculate the sum total of the rent paid during the overlap period.

Examples of Overlap Relief

Here are several examples to clarify how overlap relief works in different scenarios:

Example 1: Two Leases, Different Rental Amounts

Let’s say you currently rent a flat for £1,000 a month. You decide to move and sign a lease for a new flat starting on the 1st of July, but your current contract doesn’t end until the 15th of July.

• You will pay £1,000 for the first 15 days of July for the old flat.
• Then, from the 1st of July, you pay £1,200 for the new flat.
• Your overlap period is 15 days of July. During this time, you effectively pay £2,000 in total rent with £500 per each of the 15 days for both properties.

In this case, you need to ensure that you only pay SDLT on the rental amount applicable after the overlap ends.

Example 2: One Lease Renewal

Suppose you are renewing your lease, which was £800 per month, but the new lease starts at £900 per month. The new lease begins on the 1st of March and your old lease ends on the 31st of March.

• For March, you will pay a total of £800 for the old lease for the first 31 days and £900 for the new lease starting on the 1st of March.
• In this instance, you have overlapping rent, so your SDLT assessment is based on the combined rent for that period.

Despite paying £1,700 in total for March, SDLT will only apply to the amount you have left to pay after your old lease has ended.

Example 3: Smoother Transition

Assume you are moving to a new office where you previously paid £2,000 per month and your new rent will be £2,500 per month. Your old lease expires on the 15th of August, and your new lease begins on the 1st of August.

• For the overlap period of 1st to 15th August, you effectively pay £3,500.
  (£2,000 for your old lease and £2,500 for half the month of the new lease, but only £1,250 for the first 15 days).
• Again, you will account for this overlap and apply for the appropriate SDLT relief.

This scenario emphasizes the importance of timing when managing your leases and rent to minimize tax liability effectively.

Example 4: Shorter Overlap Period

Imagine you have a current lease ending on the 30th of June and sign for a new lease starting on the 29th of June. The old rent was £1,500, and your new rent will be £1,700. The overlap period is only two days.

• Rent you’ll pay during the overlap period is calculated as follows: You pay for two days of the old lease and then start paying full rent for the new lease immediately.

In reality, you will calculate how much that might impact your SDLT bill, ensuring that you only pay on the rent that is applicable after your old lease finishes.

Example 5: Large Rent Increase with Overlap

Consider a scenario where you have a lease for a rented property at £1,000 per month. Your new property’s lease starts 1st April at £1,800, while your current lease expires on the 15th April.

• In this case, for the first half of April, you will pay pro-rata rent to cover your overlap period.
• The total from both properties increases your taxable rent during the overlap but you will only be taxed on the amount after your original lease has ended.

Understanding these examples can help you navigate and accurately calculate the stamp duty land tax applicable when you face rent overlap situations.

Applying for Overlap Relief

To claim overlap relief, ensure you have the correct documents regarding both rental properties, especially the dates of your lease agreements and the rent amounts. Given the complexities, it may be helpful to consult with a tax professional to assist with your SDLT submissions.

Useful article? You may find it helpful to read the original guidance here: HMRC SDLT: SDLTM16005 – Reliefs and Exemptions: Rent overlap in case of further lease

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