HMRC SDLT: SDLTM16010 – Reliefs and Exemptions: Overlap relief

Overlap Relief Principles and Concepts

This section of the HMRC internal manual provides guidance on overlap relief, a tax relief mechanism. It explains the principles and concepts involved in calculating and applying overlap relief to avoid double taxation. Key points include:

• Definition of overlap relief and its purpose.
• Conditions under which overlap relief can be claimed.
• Steps for calculating overlap relief accurately.
• Examples illustrating the application of overlap relief.
• Common pitfalls and how to avoid them.

Overlap Relief from Stamp Duty Land Tax

Under the Finance Act 2003, specific provisions exist to provide relief from Stamp Duty Land Tax (SDLT) in certain situations. This relief is known as overlap relief. The criteria for this relief include the following:

• A lease (or notional lease) is replaced or followed by another lease for the same premises.
• The lease periods (or notional periods for SDLT purposes) overlap, meaning that rent payable during this overlapping period would otherwise incur SDLT twice.

Common Scenarios for Overlap Relief

There are several circumstances where overlap relief can apply. Here are some clear examples:

• If a lease is surrendered (or regarded as surrendered), and a new lease for the same or nearly the same premises is granted as part of the consideration for the surrender.
• A tenant, who is under a lease categorised by the Landlord and Tenant Act 1954 or the Business Tenancies (Northern Ireland) Order 1996, requests a new tenancy, which is then properly executed.
• For buildings, if a lease is modified, for example, by adding more floors to a building where the original lease applies, leading to a situation where the lease is surrendered and then re-granted.

Calculating Net Present Value (NPV)

When calculating the Net Present Value (NPV) of the rent under the new lease, any rent that would be payable during the overlap period is reduced by the rent already calculated for the overlap period under the old lease.

The overlap period is defined as the duration that is common to both the new and old leases. This period spans from the start date of the new lease until the original expiry date of the old lease. If the old lease was extended, these extensions should also be considered as per relevant regulations (refer to SDLTM14060 and SDLTM14070).

For the purposes of this calculation, the rent that would have been payable under the old lease is that which was factored into the NPV calculation for the SDLT on the acquisition of the original lease (refer to SDLTM13080). Further details about how to take “rent taken into account” post-completion can be found at SDLTM16011.

It is important to note that overlap relief cannot reduce the rent payable under the new lease to below zero. This means that in any year’s NPV calculation, the rent cannot be a negative number.

Important Points to Remember

• Overlap relief is only applicable if the old lease was subject to SDLT. If the old lease was subject to stamp duty instead, then the total rent under the new lease must be fully included in the NPV calculation without any reductions for overlap since no rent was considered for SDLT on the old lease.
• If a lease was exempt from SDLT and is subsequently terminated and replaced by a new lease that does not qualify for relief, then no overlap relief is available. As there was no rent included in the original amount for SDLT, there is no entitlement to such relief.
• In cases where the rent is variable and the highest rent is defined by certain provisions (refer to SDLTM13160), overlap relief will not apply in calculating the NPV of the new lease. Thus, the highest rent should be considered before any deductions for overlap relief.

Backdated Renewal Leases

Relief can also apply in situations where a renewal lease is backdated. The conditions include:

• Where the existing lease (‘the old lease’) is chargeable to SDLT.
• If the tenant continues to occupy the premises past the termination date of the old lease.

In such cases, the continued occupancy is initially viewed as an extension of the old lease by one year, which might lead to additional SDLT. Then, if a new lease is granted on or after 19 July 2006:

• For the same or similar premises as the old lease.
• And is stated to commence immediately after the end of the old lease.

The new lease will thereby be treated as starting at the termination date of the old lease for SDLT purposes, allowing for relief on rents paid from the termination date up to when the new lease is actually granted, as long as the overlap rents were accounted for in the SDLT during the holdover period (refer to SDLTM14110).

Multiple Lease Surrender

More than one lease can be surrendered in exchange for a single new lease.

For example, if a lease is granted for floors 1 to 3 of an office building and SDLT has been paid on this lease, and then this lease is surrendered and a new lease is granted for floors 1 to 6, overlap relief can be applied here. This holds true as long as the entire area covered by the original lease is included in the new lease, regardless of how much of the original lease is included in relation to the new one.

Adjustments Related to Rent Increases

When it comes to Rent Price Index (RPI) rent increases, they are disregarded for SDLT calculations, as per paragraph 7(5) of the Finance Act 2003. Thus, if the rent on the new lease is set at a level that mirrors the rent from the old lease but adjusted upwards due to RPI factors, full relief will still be applicable for the overlap period.

More examples of how overlap relief functions can be found in sections SDLTM16015 to SDLTM16035.

Useful article? You may find it helpful to read the original guidance here: HMRC SDLT: SDLTM16010 – Reliefs and Exemptions: Overlap relief

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