HMRC SDLT: SDLTM19315 – Reliefs and exemptions: Overlap relief: Example 1

Principles and Concepts of Overlap Relief

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, using a specific example to illustrate the process.

  • Overlap relief helps prevent double taxation during accounting period transitions.
  • It is relevant for businesses changing their accounting date.
  • The manual provides a detailed example to clarify calculations.
  • Understanding overlap relief is crucial for accurate tax reporting.

Understanding Overlap Relief in SDLT

What is Overlap Relief?

Overlap relief is a specific type of tax relief under Stamp Duty Land Tax (SDLT). It is important for individuals who buy new property while still owning an old property that they have not yet sold. This relief helps prevent the buyer from facing double taxation due to owning two properties simultaneously.

Here are some key points about overlap relief:

– It applies when a person buys a new property while still owning their old property.
– The relief is designed to reduce the SDLT owed when completing the purchase of the new property.
– The amount of relief depends on the SDLT that would have been paid on the old property if it had been sold earlier.

How Does Overlap Relief Work?

When a person purchases a new property but has not yet sold their previous one, they may have to pay SDLT on both transactions. That’s where overlap relief comes in. The relief means that they can claim back a portion of the SDLT previously paid on the old property when calculating the tax for the new purchase.

Here’s how it works:

1. Purchasing a New Property:
– An individual decides to buy a new home while still owning their previous property.

2. Tax Calculation:
– When calculating the SDLT for the new property, the buyer can consider the SDLT paid on the old property.

3. Claiming Relief:
– To claim the overlap relief, the buyer must calculate the SDLT that would have been charged on the old property if it had sold before buying the new one. This calculation helps reduce the SDLT liability on the new property.

Example of Overlap Relief

Let’s look at an example to clarify how overlap relief works.

– A buyer owns a house valued at £300,000 and paid some SDLT when they bought it.
– Later, the buyer decides to purchase a new property worth £450,000 while the old house is still on the market.
– Let’s assume the SDLT paid on the old property was £5,000.

Now the buyer is purchasing the new property worth £450,000 and owes SDLT on this amount. However, since they are still owning the previous house, they can claim overlap relief.

Here’s how they would calculate it:

– SDLT on New Property:
– The SDLT owed on the new property (at £450,000), according to the SDLT rates, comes to £15,000.

– Claiming Relief:
– Since the buyer has already paid £5,000 SDLT on their old property, they can apply this towards the SDLT of the new property.

– Final SDLT Due:
– Therefore, the buyer will only need to pay £15,000 – £5,000 = £10,000 in SDLT for the new property.

In this example, the overlap relief has effectively reduced the SDLT burden on the buyer by allowing them to deduct the tax already paid on the old property from the tax on the new one.

Who Can Claim Overlap Relief?

Anyone who buys a new property while still owning an old one can potentially claim overlap relief. However, there are certain conditions that must be met:

– Must have previously owned a property that is still being sold.
– Must calculate and provide evidence of the SDLT paid on the old property.
– The claim must be made when filing the SDLT return for the new property.

Important Points to Note

– Documentation: Buyers need to keep records of the SDLT they paid on their old property. This documentation is essential for claiming overlap relief when they purchase a new property.

– Claims during Property Sale: If the old property sells before the new purchase is completed, overlap relief won’t apply since it assumes the new purchase happens before the sale of the old property.

– Properties in Different Regions: The rules can vary if the properties are located in different regions of the UK. It’s important to be aware of any regional tax laws that may apply, especially as Scotland has different regulations.

– Timing of Sales: The timing of the transactions can impact eligibility for overlap relief. Generally, overlap relief is only available while still owning the previous home.

– Limitations: There are specific guidelines on how much relief can be claimed. It’s a good idea to check whether any limits apply depending on the value of the properties involved.

Making a Claim for Overlap Relief

Claiming overlap relief should be done through the SDLT return process. Here are the steps typically involved:

1. Complete the SDLT Return: When you sell the old property, complete an SDLT return for the old property sale, including the amount of SDLT paid.

2. Apply for Relief: When filling out the SDLT return for the new property, include the details of the SDLT paid on the old property to apply for overlap relief.

3. Provide Required Information: Make sure to have all the necessary details, including evidence of SDLT payments related to both properties.

4. Submit Both Returns: Submit the SDLT returns to HMRC as required, ensuring to indicate the claim for overlap relief on the new property return.

Practical Example scenarios of Overlap Relief

Understanding practical situations can provide further clarity on overlap relief. Here are a couple of additional examples:

Example 1: Buying and Selling Simultaneously
– A person currently owns a flat valued at £250,000. They buy a new house valued at £450,000 while still trying to sell the flat.
– The SDLT previously paid on the flat was £2,500.
– When they complete the purchase of the house, they will pay SDLT on the house. Assuming SDLT on the new house is £15,000, they can use the £2,500 from the flat purchase to reduce this. Hence, the final SDLT on the new house is £15,000 – £2,500 = £12,500.

Example 2: Delayed Sale
– A couple owns a house bought for £400,000 and paid £10,000 in SDLT. They decide to buy a new property for £600,000 before selling their current one.
– The SDLT owed on the new property is about £20,000. They can subtract the £10,000 paid on the old property from this, resulting in a net payment of £10,000 for SDLT.

Conclusion on Overlap Relief and SDLT Transactions

When dealing with property transactions and realizing overlap relief benefits, it’s essential to be aware of your rights and responsibilities. Understanding how overlap relief works, how to claim it, and knowing what documentation to keep will ensure a smoother transaction experience. If unsure or needing specific advice, reaching out to a tax professional or consulting the HMRC website can provide further assistance.

Useful article? You may find it helpful to read the original guidance here: HMRC SDLT: SDLTM19315 – Reliefs and exemptions: Overlap relief: Example 1

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Written by Land Tax Expert Nick Garner.
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