HMRC SDLT: SDLTM19335 – Reliefs and exemptions: Overlap relief: Example 5
Principles and Concepts of Overlap Relief
This section of the HMRC internal manual provides guidance on overlap relief, specifically through Example 5. Overlap relief is a mechanism to prevent double taxation when accounting periods overlap. The example illustrates how to calculate and apply this relief effectively.
- Overlap relief prevents double taxation in overlapping accounting periods.
- Example 5 demonstrates the calculation process.
- Guidance is aimed at HMRC staff for internal use.
- Ensures accurate tax calculations and compliance.
Read the original guidance here:
HMRC SDLT: SDLTM19335 – Reliefs and exemptions: Overlap relief: Example 5
Understanding Overlap Relief in Stamp Duty Land Tax
What is Overlap Relief?
Overlap Relief is a tax measure that allows individuals to avoid paying Stamp Duty Land Tax (SDLT) twice in certain situations. This situation usually arises when a person sells one property and buys another at the same time. If both transactions involve land or property in the UK, Overlap Relief can help reduce the tax burden.
### Key Points about Overlap Relief
– Overlap Relief applies when you are liable to pay SDLT because of a new property purchase.
– It can also be relevant when you sell a property and must pay SDLT on that sale.
– The relief helps remove the requirement to pay SDLT on the portion of the purchase price that is covered by the sale.
Example of Overlap Relief
To better understand how Overlap Relief works, let’s consider an example:
1. Suppose you own a property that you bought for £250,000 some years ago.
2. You decide to sell this property for £300,000.
3. At the same time, you find a new property that costs £400,000.
4. Normally, you would need to pay SDLT on the full £400,000 of the new property.
However, because you are also selling your old property, you have already paid SDLT on the £250,000 you originally spent.
### How Overlap Relief Calculate SDLT
Here’s how the calculation might work in this situation:
1. Determine SDLT on the new property: For a new property bought at £400,000, the SDLT might be calculated as follows (This is a simplified version, actual rates can vary):
– For the first £125,000, there is no SDLT.
– For the next £125,000, the SDLT rate is 2%.
– For the remaining £150,000, the SDLT rate is 5%.
So the SDLT due when buying the new property might look like this:
– £0 on the first £125,000 = £0
– £2,500 on the next £125,000 (2% of £125,000) = £2,500
– £7,500 on the final £150,000 (5% of £150,000) = £7,500
Total SDLT on the new property = £0 + £2,500 + £7,500 = £10,000.
2. Determine the SDLT already paid on the old property: You already paid SDLT when purchasing your old property, as calculated at the time of purchase (assume it was relatively low as housing costs rise).
3. Calculate the Overlap Relief: If SDLT was paid on the purchase price of £250,000, you will need to subtract that from the SDLT due on the new property:
If we assume you paid £0 based on pricing back then because it was below £125,000, your SDLT would effectively be:
– New SDLT = £10,000 – £0 = £10,000.
### Important Considerations
– Complete forms correctly: To claim Overlap Relief, you must complete the necessary forms accurately and submit them on time.
– Keep records: Maintain thorough records of both the sale and purchase transactions as HMRC may request evidence to verify the claims you make.
– Timing matters: Overlap Relief is only applicable to transactions that occur simultaneously or closely together, so ensure you understand the timelines involved.
– Different rules may apply: Legislation might change or vary in different parts of the UK. Overlap Relief specifically refers to transactions that fall under SDLT rules.
Eligibility for Overlap Relief
Not everyone is eligible for Overlap Relief. To qualify, you generally must meet the following criteria:
– The property must have been sold or transferred for cash or other compensation.
– You must have purchased the new property shortly after selling the old one.
– Both transactions should be within reasonable time frames to demonstrate that they are linked.
### When You Cannot Claim Overlap Relief
There are certain situations where Overlap Relief does not apply:
– If the old property was transferred to someone else without the consideration of payment.
– When there are significant delays between the sale and purchase that cannot be justified as linked.
– If both transactions fall under different tax regimes or legislation.
Practical Steps for Claiming Overlap Relief
Follow these steps to ensure you properly claim Overlap Relief:
1. Check your eligibility: Review the above criteria carefully to establish that you qualify for Overlap Relief.
2. Calculate the relevant SDLT amounts: Work through the SDLT calculations on both properties, paying special attention to the amount of tax already paid on the old property.
3. Complete the SDLT return: You must submit the required forms to HMRC correctly. These can usually be done online.
4. Maintain documentation: Keep copies of sale agreements, purchase contracts, and any correspondence with HMRC to support your claim.
### Additional Resources
For more detailed information or guidance, you can refer to HMRC’s website or consult a tax professional. This will help you navigate the specifics of your situation and ensure compliance with current tax laws.
It’s also essential to stay updated on any changes in regulations or rates concerning SDLT and Overlap Relief.
Implications of Overlap Relief
Understanding Overlap Relief can lead to significant savings. If you are in the process of buying a new home while selling your current property, make sure to consider the potential benefits of this relief. Here are some points illustrating its impact:
– Financial Savings: By reducing the SDLT you owe, you can save a considerable amount of money, which can be redirected toward your new home purchase.
– Easier Transactions: Knowing that you have support in navigating your tax obligations can relieve some stress during what can be a complicated process of buying and selling.
– Encourages Mobility: With potential tax liabilities reduced, homeowners might feel more encouraged to move, which can positively influence the housing market.
Remember that all applicable rules change, and you need to review your circumstances closely against current laws to ensure you’re taking full advantage of available reliefs like Overlap Relief.
By understanding how this relief works, you can better prepare for your property transactions and minimise any uneccessary tax burdens along the way.