Read the original guidance here:
HMRC SDLT: SDLTM16030 – Reliefs and Exemptions: Overlap relief: Example 4

Understanding Overlap Relief in Lease Transactions

This article explains the concept of overlap relief in the context of lease transactions. Overlap relief is a mechanism that allows for the adjustment of stamp duty land tax (SDLT) payable when a new lease is granted that overlaps with an existing lease. We will walk through a practical example to clarify how this relief works.

Key Information about the Old Lease

• Start Date: The old lease was granted on 1 April 2004.
• Duration: The old lease is for 25 years, expiring on 31 March 2029.
• Annual Rent: The rent payable under the old lease is £144,000.
• Net Present Value (NPV): The NPV of the old lease is calculated to be £2,373,337.
• Stamp Duty Land Tax (SDLT): SDLT due on this old lease is £22,233.

Details of the New Lease

• Start Date: The new lease is granted on 1 October 2008.
• Duration: This lease has a duration of 150 years.
• Annual Rent: The rent under the new lease is set at £175,000.

Understanding the Overlap Period

The overlap period occurs when both the old and new leases are active. In this particular case, the overlap period runs from 1 October 2008 to 31 March 2029, giving us a total of twenty years and six months of overlap. During this time, both leases exist simultaneously, which affects the calculation of the SDLT due on the new lease.

Calculating the Net Present Value (NPV) for the New Lease

When calculating the NPV for the new lease, the rent amounts from both leases must be considered during the overlap period. Let’s break down the calculation year by year.

Years 1 to 20

During the first twenty years of the new lease:

• The annual rent for the new lease is £175,000.
• The annual rent for the old lease remains at £144,000.
• The rent difference that is taken into account for NPV calculations is £31,000 (£175,000 – £144,000).

Year 21 Calculation

For the 21st year, the rent is calculated differently as there are six months where overlap occurs:

• The new rent for the first six months is £87,500, while the old rent is £72,000.
• The difference for these six months is £15,500 (£87,500 – £72,000).
• For the next six months, there is no overlap, so the rent for the second half of the year will be solely based on the new lease rent of £87,500.
• Thus, for year 21, the total rent considered for NPV is £15,500 (from overlap) + £87,500 (non-overlap) = £103,000.

Years 22 to 150

From the 22nd year onwards, the rent remains consistent at £175,000 for each year until the lease concludes. Therefore, the calculation remains straightforward for these years.

Calculating the Overall NPV and SDLT Due

Now, we can combine all the components for our final NPV calculation:

• NPV Contribution:
  
  – Years 1 to 20: £31,000 each year over 20 years
  – Year 21: £103,000
  – Years 22 to 150: £175,000 each year over 129 years

The NPV total, when calculated from these contributions, sums up to £2,889,750.

Stamp Duty Land Tax Calculation

Based on the final NPV of the new lease, the SDLT due is calculated as £27,397. It is important to note that due to the complexity of the calculations involved, especially with the overlap relief, it is recommended to conduct these calculations manually, as the calculators available may not handle the details appropriately.

Final Note on Overlap Relief

Overlap relief allows businesses and individuals entering new leases to ensure they are not penalised by having to pay SDLT for both leases simultaneously. By accurately calculating the NPV for both leases and understanding the implications of the overlap period, taxpayers can better manage their tax liabilities concerning leases.

For more information on specific SDLT calculations and further examples, please refer to the official HMRC guidance or consult a tax advisor.