Read the original guidance here:
HMRC SDLT: SDLTM16035 – Reliefs and Exemptions: Overlap relief: Example 5

Overview of the Transaction
In this example, we will examine a lease agreement scenario that illustrates how overlap relief works under Stamp Duty Land Tax (SDLT). It involves the old lease and the new lease, which have different terms and rental amounts.

Details of the Old Lease
– Grant Date: 1 April 2004
– Duration: 25 years, expiring on 31 March 2029
– Initial Rent: The starter rent is £144,000 each year, which includes £120,000 plus VAT.
– Rent Review: The lease includes a feature where the rent can be reviewed. The rent will be adjusted to the higher amount of either the market rent or the passing rent from 1 April 2009, and then every five years afterwards.
– Rent Review Adjustment: By the time of the first rent review on 1 April 2014, the rent increased to £240,000 per year (£200,000 plus VAT).

Details of the New Lease
– Grant Date: The old lease is surrendered and a new lease starts on 1 April 2018.
– Duration: The new lease runs for 150 years.
– Annual Rent: The rent established under the new lease is £210,000 per year, which breaks down to £175,000 plus VAT.
– Rent Review: Unlike the old lease, the new lease does not have any rent review provisions.

Calculating the Net Present Value (NPV)
– Due to the timing of the first rent review in the old lease occurring after five years, it is not counted in the NPV calculations (as stated in the guidance at SDLTM13160).
– The NPV for the old lease has been calculated at £2,373,337.

Understanding the Overlap Period
– The overlap period is defined as the time from 1 April 2018 until 31 March 2029, giving a total of 11 years.
– During the first five years of the overlap (from 1 April 2018), the annual rent under the new lease is £210,000. At the same time, the rent under the old lease, which is still technically valid, is £240,000.

Impact of Rent on NPV Calculation
– Although the previous rent of £240,000 was not incorporated in the initial NPV calculation, it must be acknowledged for the purpose of overlap relief. This is because it represents the effective rent under the terms of the old lease during that timeframe.
– The new lease won’t change its rent, meaning it does not fall under the ‘variable rent’ category. Hence, the provisions under FA03/SCH17A/PARA7 regarding variable rents do not apply here.
– For the NPV calculation during the first 11 years:
– For the first 11 years, the rent considered for analysis would be zero. Although the new lease has a lower rent than the old one, the amount cannot be less than £0.
– From years 12 through to the end of the new lease (which is 150 years), the rent used in the calculation will be the £210,000 per year.

Important Considerations for Calculating Overlap Relief
– Calculating overlap relief can be complex, and it is important to follow a manual process rather than rely on automated calculators, as they may not accommodate the specifics of this situation.
– The first five years’ rent from the new lease, being less than the rent under the old lease, leads to a situation where the overlap relief recognises this disparity. The process takes into account the previously agreed rent despite the change in contracts.

Practical Example to Illustrate the Concept
To better understand the dynamics of the old and new leases, imagine a case where a business has taken a property on lease for an extended period. Initially, the rent is set at £144,000, which gradually increases due to market conditions to £240,000 at the first review.

When the business decides to move to a different lease with lower terms at £210,000 but with a significantly longer term of 150 years, it raises questions about how much of the old lease can still impact their tax obligations. The critical takeaway here is that while the new lease appears beneficial due to the lower rent, the tax calculation for overlap relief must still consider the existing obligations from the old lease as it directly affects the amount that is subject to SDLT during the overlap period.

What to Keep in Mind
– Always ensure to check what rent amounts are applicable for calculations when switching leases.
– Consider the timeline of both leases and how they interplay with the tax obligations.
– It’s advisable for taxpayers to document all the calculations and reasoning behind any figures used, should they need to justify them to HMRC.

This example illustrates how SDLT calculations can be influenced heavily by previous lease agreements, especially when transitioning between contracts. As such, ensuring clarity and accuracy when dealing with overlap relief is important to avoid common pitfalls that could lead to incorrect tax assessments.