HMRC SDLT: SDLTM16020 – Reliefs and Exemptions: Overlap relief: Example 2

Overlap Relief: Example 2

This section of the HMRC internal manual provides guidance on Overlap Relief, focusing on Example 2. It explains the principles and concepts related to tax relief for overlapping periods of income. Key points include:

• Definition and purpose of Overlap Relief.
• Calculation methods for determining overlap profits.
• Examples illustrating the application of Overlap Relief.
• Impact on tax liabilities and financial planning.

Stamp Duty Land Tax (SDLT): Overlap Relief Explained with an Example

Understanding Overlap Relief

Overlap relief helps reduce the amount of Stamp Duty Land Tax (SDLT) you need to pay when you surrender an existing lease and take on a new one. This is especially relevant when your new lease overlaps with your old one. It’s important to be clear about how this works, as it can save you money.

Key Details of the Example

Let’s look at a practical example to understand how overlap relief functions.

1. Old Lease Details:
– A lease was granted on 1 April 2004.
– The lease is for 25 years, meaning it expires on 31 March 2029.
– The rent for this lease is £144,000 each year.
– The net present value (NPV) of this lease is calculated to be £2,373,337.
– The SDLT paid on this rent amounts to £22,233.

2. New Lease Details:
– The existing lease is surrendered, and a new lease is granted on 1 April 2018.
– This new lease lasts for 150 years.
– The annual rent for the new lease is £175,000.

Overlap Period Explanation

The overlap period refers to the time frame when both the old lease and the new lease are in effect. In our example, the overlap period starts on 1 April 2018 and ends on 31 March 2029. This means there is a total of 11 years where both leases coexist.

– Rent during the Overlap
– Under the old lease, the rent remains at £144,000 per year.
– Under the new lease, the rent is set at £175,000 per year.

Calculating the Amount Subject to SDLT During the Overlap

The SDLT calculation during the overlap period requires some adjustment due to the difference in rents between the old and new leases.

1. Net Rent Calculation:
– For the 11 years of overlap, the excess rent is calculated as follows:
New rent (£175,000) minus Old rent (£144,000) equals £31,000.
– This £31,000 is the additional rent that is effectively paid during the overlap period.

2. Breakdown of Rent for SDLT Calculation:
– For the first 11 years of the new lease (the overlap period), the rent to be considered for the purpose of SDLT calculation will be £31,000.
– For the remaining years, which is essentially 139 years (from year 12 to year 150), the full rent of £175,000 will apply.

Key Points in Calculation

– The new lease is straightforward, with no variable rent involved. This means that certain details outlined in legislation (FA03/SCH17A/PARA7) do not come into play for this specific scenario.
– Given that the SDLT calculator cannot accurately perform this type of calculation, the calculations need to be done manually.

Final Note on SDLT Payment

When calculating the SDLT amount due, it is crucial to combine the figures correctly by taking into account the adjusted rent over the specified periods. It’s important for anyone entering into new lease agreements while surrendering old ones to be aware of these provisions regarding overlap relief so that they can effectively manage their SDLT obligations.

This example illustrates the importance of understanding how overlap relief works, ensuring that SDLT payments are accurate and justified during any lease transition.

Useful article? You may find it helpful to read the original guidance here: HMRC SDLT: SDLTM16020 – Reliefs and Exemptions: Overlap relief: Example 2

View all HMRC SDLT Guidance Pages Here