HMRC SDLT: SDLTM19310 – 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 prevent double taxation on profits.
- Overlap relief is designed to address double taxation issues.
- It applies to businesses with accounting periods overlapping the tax year.
- Guidance is provided for calculating overlap profits.
- Instructions are included for claiming the relief effectively.
Read the original guidance here:
HMRC SDLT: SDLTM19310 – Reliefs and exemptions: Overlap relief
Understanding Overlap Relief in Stamp Duty Land Tax
What is Overlap Relief?
Overlap relief is a type of relief that helps homeowners avoid paying Stamp Duty Land Tax (SDLT) twice on the same property. It is specifically relevant in situations where a person purchases a new property while still owning an existing one, and the contract for the new purchase overlaps with the ownership of the old one.
Key Principles of Overlap Relief
– Purpose of Overlap Relief: The main idea behind overlap relief is to prevent homeowners from facing extra costs when they move from one property to another. It ensures that they are not taxed on the same property value more than once.
– Eligibility for Overlap Relief: To qualify, you need to meet certain conditions, including:
– Owning two properties at the same time (the old and the new).
– Being liable for SDLT on both transactions.
– The contracts for buying or selling must overlap in time.
How Overlap Relief Works
When you buy a new home and still own your previous home, there are typically two transactions involved:
1. The purchase of the new property.
2. The sale of the old property.
Let’s say you purchase a new house for £300,000 while still owning your old house. You may be liable to pay SDLT on this amount. If you also make an agreement to sell your old house for £250,000, overlap relief can come into play during the calculation of SDLT.
### Example of Overlap Relief
– Scenario:
– You buy a new property for £300,000 in January.
– You sell your old property for £250,000 in February.
– How the Tax Works:
– When buying the new property, SDLT is calculated based on the purchase price of £300,000.
– Since there is an overlap in ownership, when you sell the old property, you can deduct the amount you would pay for SDLT based on the sale price from what you owed on the new property.
This means you will not be counted twice for taxation purposes on the part of the property value that overlaps.
Calculating Overlap Relief
Calculating overlap relief can involve determining the SDLT liability on both properties and then deducting the relevant amounts. Here’s how the calculation generally works:
1. Calculate SDLT on the new property:
– Use the current SDLT rates to determine how much tax is due on the purchase price of the new property (£300,000).
2. Calculate SDLT on the old property:
– Use the rates effective when you made the sale of the old property (£250,000) to find the relevant relief.
3. Combine the figures:
– You will then subtract the SDLT due on the old property from the amount due on the new property.
### Detailed Example
– New Property Purchase:
– Purchase Price: £300,000
– Assuming the SDLT on this amount is calculated as follows:
– The first £125,000 is tax-free.
– The next £125,000 (from £125,001 to £250,000) incurs a tax rate of 2%.
– The remaining £50,000 (from £250,001 to £300,000) incurs a tax rate of 5%.
– So, the calculation would be:
– £0 for the first £125,000
– £2,500 (2% of £125,000) for the second portion
– £2,500 (5% of £50,000) for the remainder
– Total SDLT on the new property: £5,000
– Old Property Sale:
– Sale Price: £250,000
– The SDLT on this might be calculated similarly.
– £0 for the initial £125,000.
– £2,500 for the next £125,000 (2% of £125,000).
– Total SDLT on the old property: £2,500.
– Overlap Relief Calculation:
– Total SDLT on new property: £5,000
– Total SDLT on old property: £2,500
– Therefore, the amount of SDLT payable after overlap relief is £2,500 (£5,000 – £2,500).
Conditions for Applying Overlap Relief
To take advantage of overlap relief, certain conditions must be met. They include:
– You must have a legal agreement (contract) for both properties within the same period.
– When calculating the relief, the overlap must be for residential property and not commercial property.
– Be aware that overlap relief cannot be claimed for properties that were not subject to SDLT when you purchased them.
– You must have owned the properties for certain specified lengths of time.
Documenting Overlap Relief Claims
When claiming overlap relief, it is important to keep proper records. This documentation should include:
– Contracts for the sale and purchase of the properties.
– SDLT returns showing calculations for both properties.
– Proof of payment of any SDLT owed.
These documents may be needed if HMRC requires further information when reviewing your claim.
Common Questions about Overlap Relief
1. Can I claim overlap relief if my properties weren’t sold simultaneously?
Yes, overlap relief can still apply as long as both contracts are effectively overlapping in time despite not closing on the same day.
2. What if I sell my old property after buying a new one?
You can still claim overlap relief, provided both transactions happen within a reasonable timeframe that meets the necessary conditions.
3. Does overlap relief apply if I bought a new home first?
Yes, you can still claim overlap relief regardless of which property was purchased or sold first.
4. What if my new property is more expensive than my old one?
Overlap relief functions the same way regardless of the price difference between the two properties.
5. Are there any exceptions to the overlap relief?
If the properties are commercial, you would not be entitled to overlap relief. Additionally, if either property was exempt from SDLT at the time of purchase, then relief may not apply.
Conclusion
It is important for homeowners to understand overlap relief and its application when dealing with transactions involving multiple properties. Properly calculating the relief can significantly lessen the financial burden associated with moving from one home to another. Always keep accurate and thorough documentation related to your cases to ensure a smooth claiming process.