HMRC SDLT: SDLTM16015 – Reliefs and Exemptions: Overlap relief: Example 1

Principles and Concepts of Overlap Relief

This section of the HMRC internal manual explains the principles and concepts of overlap relief, focusing on an example scenario. Overlap relief is a tax mechanism designed to prevent double taxation on profits. Key points include:

• Overlap relief applies when accounting periods overlap, causing profits to be taxed twice.
• The relief allows businesses to claim back the overpaid tax in future periods.
• Understanding the calculation of overlap profits is crucial for accurate tax reporting.

Title: SDLTM16015 – Reliefs and Exemptions: Overlap Relief: Example 1

This article explains how overlap relief works for Stamp Duty Land Tax (SDLT) using a specific example involving two leases.

Understanding the Basics of Overlap Relief

When you acquire a new lease while still holding an old one, you may be eligible for something called overlap relief. This allows you to offset the cost of the old lease against the new one to ensure you are not taxed on the same rental amount twice.

The concept can be complex, but let’s break it down with a clear example to illustrate how it works.

Example Scenario

In this example, we will look at two leases:

• Old Lease:
  • Start Date: 1 April 2004
  • Duration: 25 years
  • Expiry Date: 31 March 2029
  • Annual Rent: £144,000
  • Net Present Value (NPV): £2,373,337
  • Stamp Duty Land Tax Payable: £22,233
• New Lease:
  • Start Date: 1 April 2018
  • Duration: 150 years
  • Annual Rent: £110,000

The Terms of the Leases

The first lease is an old lease originally taken out in 2004 and is set to expire in 2029. The rent established for this lease is £144,000 each year. When you calculate the NPV, which helps determine the total value of this lease for tax purposes, it comes to £2,373,337. Therefore, the SDLT payable on this old lease is £22,233.

On the other hand, you decide to surrender the old lease and enter a new lease in 2018. This new lease lasts for a significantly longer period—150 years—and the annual rent is £110,000.

Calculating the Overlap Period

The overlap period is the time span between when the new lease starts and when the old lease ends. In this scenario, the overlap period runs from 1 April 2018 to 31 March 2029, lasting for a total of 11 years.

Here’s how the rents compare during this overlap period:

• Old Lease Rent: £144,000 per year
• New Lease Rent: £110,000 per year

NPV Calculation During the Overlap Period

To calculate the NPV for the new lease during the overlap period, we need to follow a specific method. Since the new lease’s rent is less than the old lease’s rent, this requires special handling.

• For each of the first 11 years (from 1 April 2018 to 31 March 2029), you will calculate the NPV considering the rental income.
• For years 1 to 11, which corresponds to the overlap period, the old rent is higher than the new rent (£144,000 vs £110,000). Because SDLT rules state we cannot use a negative value, we input £0 for the NPV calculation for these overlap years.
• For the subsequent years (years 12 to 150), you will use the new lease rent of £110,000, as it falls outside the overlap period.

Manual Calculation Requirement

Since the calculator designed for these calculations may not suffice due to the unique nature of this scenario, you will need to perform this calculation manually. It’s crucial to ensure you consider both the old and the new rent accurately to comply with tax liabilities.

Key Takeaways

• The old lease NPV is significant when calculating the SDLT.
• The overlap relief helps prevent double taxation on rental income during the transition from the old lease to the new lease.
• Understanding how to calculate the NPV during the overlap period correctly is essential for accurate tax reporting.

With this example, we can see that managing leases requires careful consideration of various factors to ensure compliance with tax regulations and to make sure you don’t overpay taxes.

Useful article? You may find it helpful to read the original guidance here: HMRC SDLT: SDLTM16015 – Reliefs and Exemptions: Overlap relief: Example 1

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