HMRC SDLT: SDLTM19320 – Reliefs and exemptions: Overlap relief: Example 2

Overlap Relief: Example 2

This section of the HMRC internal manual provides guidance on overlap relief, a tax relief mechanism for businesses. It explains the principles and concepts involved in calculating overlap relief, using a specific example to illustrate the process.

Overlap relief helps businesses avoid double taxation during accounting period changes.
The example demonstrates how to calculate overlap profits.
It highlights the importance of accurate record-keeping for tax purposes.
Guidance is provided on applying relief to minimise tax liabilities.

Guidance Image

Read the original guidance here:
HMRC SDLT: SDLTM19320 – Reliefs and exemptions: Overlap relief: Example 2

Understanding Overlap Relief in SDLT

Overlap relief is an important principle in Stamp Duty Land Tax (SDLT) that can benefit buyers who have previously owned a property. This guide will explain what overlap relief is, how it works, and provide an example to illustrate its application.

What is Overlap Relief?

When you buy a new property and already own another property, you may be liable to pay some SDLT on both transactions. Overlap relief allows you to claim back some of the SDLT you paid when you sell your old property, under certain conditions. This relief helps to ensure that you are not double taxed on the same property transfer.

Key Conditions for Overlap Relief

To qualify for overlap relief, you must meet the following conditions:

You must have existed within a period of owning the previous property and have purchased a new property.
The transaction with the first property must have been completed up to three years before the completion of your new property purchase.
You must sell your previous property after the new property’s purchase.

Calculating Overlap Relief

The amount of overlap relief granted is based on the SDLT paid on the previous purchase. The procedure to calculate overlap relief involves the following steps:

Determine the amount of SDLT you paid when purchasing your first property.
Identify the portion of the initial SDLT liability that corresponds to the value of your old property when sold.
Claim this amount as a relief against your new property purchase SDLT cost.

Example of How Overlap Relief Works

To illustrate the process of claiming overlap relief, consider the following example:

Scenario

Sam bought his first house in January 2019 for £300,000 and paid £1,500 in SDLT. In March 2021, Sam purchased a new property for £500,000. He then sold the first house in May 2021.

Step 1: Identify SDLT on the First Property

When Sam bought his first house in January 2019, he paid an SDLT of £1,500. This amount is the basis for potential relief.

Step 2: Calculate the SDLT on the New Property

For the new property worth £500,000, Sam would typically calculate his SDLT as follows:

The first £125,000 is tax-free.
From £125,001 to £250,000 (the next £125,000), the rate is 2%, which is £2,500.
From £250,001 to £500,000 (the final £250,000), the rate is 5%, which is £12,500.

Therefore, the total SDLT on the new property equals £0 + £2,500 + £12,500 = £15,000.

Step 3: Determine Overlap Relief

Since the first property was sold in May 2021, after purchasing the new property in March 2021, Sam qualifies for overlap relief. The relief that he can claim is equal to the SDLT he originally paid on the first property, which is £1,500.

Step 4: Applying Overlap Relief

Sam applies this £1,500 overlap relief to the SDLT he owes on the new property:

Initial SDLT Due: £15,000
Overlap Relief: £1,500
Final SDLT Due: £15,000 – £1,500 = £13,500

Consequently, Sam saves £1,500 on the SDLT he would have paid for his new property due to the overlap relief.

How to Claim Overlap Relief

To claim overlap relief, you should follow these steps:

Complete your SDLT return for the new property, ensuring to include the eligibility for overlap relief.
Confirm and list the amount you are claiming for overlap relief based on your previous transaction.
Submit the SDLT return to HM Revenue and Customs (HMRC) within the required timeframe.

Important Considerations

Here are a few things to remember when dealing with overlap relief:

Overlap relief is only available if you sell your previous home after buying your new one.
The allowable relief is limited to the SDLT you originally paid on your first property and cannot exceed this amount.
This relief applies only to transfers that fall within the relevant timeframes outlined in the rules.

Additional Resources

If you need help understanding overlap relief further or wish to see more examples, you can refer to official HMRC guidance. For specific queries related to your situation, consider getting professional advice or contacting HMRC directly.

Moreover, remember that since April 2015, SDLT no longer applies to land transactions in Scotland. Instead, these transactions are subject to the Land and Buildings Transaction Tax (LBTT). If you have further queries on how these changes may affect you, refer to your local regulations or a qualified tax adviser.