HMRC SDLT: SDLTM19325 – Reliefs and exemptions: Overlap relief: Example 3

Principles and Concepts of Overlap Relief

This section of the HMRC internal manual provides guidance on overlap relief, specifically through Example 3. It explains the principles and concepts related to overlap relief, which is a tax relief available to businesses.

  • Overlap relief is applicable when accounting periods overlap.
  • It helps prevent double taxation on the same income.
  • Example 3 illustrates the calculation and application of overlap relief.
  • This guidance is intended for HMRC internal use.

Understanding Overlap Relief in Stamp Duty Land Tax

The Stamp Duty Land Tax (SDLT) is a tax paid when purchasing a property or land in the UK. However, there are certain reliefs available that can reduce the amount you owe. One such relief is known as overlap relief. This article will explain what overlap relief is, how it operates, and provide an example to illustrate how it works.

What is Overlap Relief?

Overlap relief is a type of relief available for buyers who purchase a property while still owning another property that they are also liable to pay tax on. This situation can occur when someone is moving from one home to another and ends up with overlapping ownership. The idea behind overlap relief is to ensure that you are not double-taxed during this transition period.

Key Principles of Overlap Relief

Overlap relief operates under specific conditions:

  • Multiple Properties: Overlap relief applies when a buyer has more than one property at the same time.
  • Claiming Relief: The buyer must claim the overlap relief when completing their SDLT return.
  • Adjustment of Transaction Value: The amount of SDLT paid on the new property can be adjusted to account for the tax already paid on the previous property.

How Does Overlap Relief Work?

To put overlap relief into context, let us consider an example that demonstrates how this tax relief functions.

Example of Overlap Relief

Imagine you currently own a house that you are planning to sell. You have found a new property to buy and decide to purchase it before selling your old house. At this point, you own two properties simultaneously: the old house and the new home.

The total price of the new property you are buying is £300,000. Let’s say you paid £5,000 in SDLT on the purchase of your old house when you bought it. Because you are now in a situation where you own both properties for a period, you can apply for overlap relief.

Calculating SDLT with Overlap Relief

The SDLT on your new property would typically be calculated based on the full purchase price. However, with overlap relief, you can take into account the SDLT already paid on the old property. Here’s how the calculation would work:

  • The SDLT on the purchase of the new property at £300,000 is calculated first. Assume the SDLT on this price is £5,000.
  • Since you have already paid £5,000 on the old property, the total tax you will be liable for on the new purchase is adjusted.
  • If the overlap relief is successful, you may not owe any additional SDLT on the new property purchase, as the amount already paid eliminates any further liability.

Important Things to Note About Overlap Relief

Understanding the details surrounding overlap relief is vital for anyone who might qualify. Here are several important points to remember:

  • Claiming the Relief: You must specifically claim overlap relief on your SDLT return, or you might miss out on this opportunity for tax reduction.
  • Timing is Key: Overlap relief can only be claimed if the purchase and sale happen within a reasonable timeframe, generally understood to be simultaneous transactions.
  • Sale of the Old Property: If you successfully sell your old house before purchasing the new one, overlap relief may not apply.
  • Documentation Required: To claim the relief, documentation proving both property transactions may be necessary.

Guidelines for Applying Overlap Relief

If you think you may be eligible for overlap relief, here are steps and guidelines to consider:

  1. Gather Legal Documentation: Ensure you have all the purchase and sale agreements handy, as these will be important for your application.
  2. Complete the SDLT Return: Fill out the SDLT return form accurately, indicating that you are claiming overlap relief.
  3. Submit your Claim: After completing the form, submit it to HM Revenue and Customs (HMRC) along with any required documents.
  4. Wait for Confirmation: After submitting your claim, await confirmation from HMRC regarding the overlap relief.

Potential Challenges with Overlap Relief

While overlap relief can offer significant savings, there can also be challenges when attempting to claim it:

  • Complex Transactions: If the sale and purchase become complicated with various conditions or changes in plans, it may impact your eligibility.
  • Failure to Claim: If you do not include a request for overlap relief on your SDLT return, you could miss out on the benefit.
  • Confusion with Tax Bands: Understanding the correct SDLT rates and how overlap relief affects your tier in tax bands can be confusing.

Conclusion on Overlap Relief

There are important considerations concerning overlap relief, from understanding its principles to ensuring you claim it correctly. If you ever find yourself owning two properties simultaneously, it is worthwhile to investigate overlap relief. With the right steps, you could potentially avoid significant costs related to Stamp Duty Land Tax.

For further guidance, you can visit the link to learn more about claiming overlap relief under SDLT: SDLTM19325 – Reliefs and exemptions: Overlap relief: Example 3.

Note that since April 2015, SDLT does not apply to land transactions in Scotland. Instead, these transactions fall under the Land and Buildings Transaction Tax.

Useful article? You may find it helpful to read the original guidance here: HMRC SDLT: SDLTM19325 – Reliefs and exemptions: Overlap relief: Example 3

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