Example of Overlap Relief Calculation for Lease Agreements with Different Terms

SDLT overlap relief where a replacement lease has lower rent

When an old lease is surrendered and replaced with a new lease of the same property, SDLT overlap relief stops the same rent being taxed twice. If the old rent is higher than the new rent during the overlap period, the rent counted for the new lease can be reduced to nil for that period, but not below nil, and any part-year after the overlap must be apportioned.

• Overlap relief applies where a new lease starts before the old lease would have ended, creating an overlap period.
• In HMRC’s example, the old lease rent was £144,000 a year and the new lease rent was £110,000 a year, so the overlap period rent for the new lease was reduced to £0.
• For the new lease NPV calculation, years 1 to 10 were treated as £0, year 11 as £55,000, and years 12 onwards as £110,000.
• The relieved amount for the new lease cannot be reduced below £0, even if the old rent is higher throughout the overlap.
• This is not treated as a variable rent case, so the special Schedule 17A paragraph 7 Finance Act 2003 rule does not apply.
• HMRC says its calculator cannot deal with this example, so the SDLT calculation may need to be done manually, especially where the overlap ends part-way through a lease year.

Scroll down for the full analysis.

SDLT overlap relief on a replacement lease where the new rent is lower than the old rent

This page explains how overlap relief works for Stamp Duty Land Tax when an existing lease is surrendered and replaced with a new lease, and the two leases overlap for a period. The example here deals with a common practical problem: the rent under the new lease is lower than the rent under the old lease during the overlap period. That matters because SDLT on rent is based on the net present value of the rent, and overlap relief is designed to stop the same rental value being taxed twice.

What this rule is about

When a tenant gives up an existing lease and takes a new lease of the same property, there may be an overlap period. This is the period during which the old lease would still have had time left to run, but the new lease has already begun.

Without special rules, SDLT on the new lease could charge rent that has already effectively been brought into charge under the old lease. Overlap relief is intended to prevent that double charge.

The issue in this example is how to calculate the rent to include in the SDLT net present value calculation for the new lease where:

• the old lease still had more than 10 years left to run,
• the new lease starts before the old lease’s contractual expiry date, and
• the rent under the new lease is lower than the rent under the old lease during the overlap period.

What the official source says

The HMRC manual example starts with an old lease granted on 1 April 2004 for 25 years, expiring on 31 March 2029, with annual rent of £144,000. The net present value of that old lease was £2,373,337, and SDLT of £22,233 was payable on the rent.

The old lease is then surrendered and replaced by a new lease granted on 1 October 2018 for 150 years at annual rent of £110,000.

The overlap period runs from 1 October 2018 to 31 March 2029, which is 10 years and 6 months.

HMRC’s conclusion is that, because the rent under the old lease during the overlap period (£144,000) is higher than the rent under the new lease (£110,000), the amount brought into the new lease NPV calculation for the overlap period is reduced to nil. It cannot go below nil.

So for the new lease:

• years 1 to 10 are treated as £0 rent for NPV purposes,
• year 11 is treated as £55,000, because only the second half of that year falls outside the overlap period, and
• years 12 to 150 are treated as £110,000.

The manual also says this is not a variable rent case, so the special rule in Schedule 17A paragraph 7 Finance Act 2003 does not apply.

HMRC notes that its calculator cannot handle this calculation, so it must be done manually.

What this means in practice

The practical point is simple: during the overlap period, you compare the rent under the old lease with the rent under the new lease. If the old rent is higher, the overlap relief can reduce the amount counted under the new lease to nil for that period.

In this example, the new rent is £110,000 a year, but the old rent was £144,000 a year. Because the old rent already exceeds the new rent throughout the overlap period, there is no additional rent value to bring into charge on the new lease for that period.

That does not mean the new lease is ignored altogether. It means only that the overlapping part is relieved. Once the overlap period ends, the full new rent is included in the NPV calculation in the usual way.

The partial year is important. Here, the overlap does not end neatly at the end of a rental year in the new lease. It ends halfway through year 11 of the new lease. So the first six months of year 11 are relieved to nil, and the second six months are included. That produces £55,000 for year 11.

This example also shows that SDLT lease calculations do not always fit neatly into automated tools. Where overlap relief applies across part-years, a manual calculation may be necessary.

How to analyse it

A sensible way to approach this kind of case is:

• Identify the old lease and the new lease.
• Confirm that the old lease was surrendered and a new lease granted.
• Work out the overlap period: from the start date of the new lease to the date the old lease would have expired.
• Compare the rent payable under each lease during the overlap period.
• For each part of the overlap period, reduce the rent counted for the new lease by the amount already represented by the old lease rent.
• Do not allow the figure for the new lease to fall below £0.
• If the overlap ends part-way through a year of the new lease, apportion that year on a month-by-month or day-by-day basis, as HMRC indicates in the example.
• After the overlap period ends, include the full rent under the new lease in the NPV calculation.

In this example, that process leads to:

• years 1 to 10: £0 each year, because the whole of those years falls within overlap and the old rent exceeds the new rent,
• year 11: £55,000, because only half the year falls outside overlap,
• years 12 onwards: £110,000 each year.

Example

Illustration based on the HMRC example:

A tenant has a lease due to expire on 31 March 2029 at £144,000 a year. On 1 October 2018, that lease is surrendered and replaced by a 150-year lease at £110,000 a year.

For SDLT on the new lease, the period from 1 October 2018 to 31 March 2029 overlaps with the remaining term of the old lease. During that period, the old rent is higher than the new rent. So the rent taken into account for the new lease during the overlap is reduced to nil, not to a negative figure.

The overlap covers the first 10 full years of the new lease and the first 6 months of year 11. So:

• years 1 to 10 count as £0,
• year 11 counts as £55,000,
• the remaining years count as £110,000.

The SDLT NPV calculation for the new lease must then be done using those adjusted figures.

Why this can be difficult in practice

The legal idea is straightforward, but the calculation can be awkward.

First, the overlap period may not match lease years. If it ends part-way through a year, an apportionment is needed. HMRC says this should be done on a month-by-month or day-by-day basis.

Second, not every lease with changing amounts payable is a variable rent case. The manual specifically says the special variable rent rule is not relevant here. So it is important not to apply the wrong regime.

Third, software may not cope with overlap relief properly, especially where there is a part-year adjustment. The manual expressly says the calculator will not handle this example and the calculation should be done manually.

Finally, overlap relief depends on the relationship between the old and new leases and the rents payable under each. If the facts differ, the calculation may also differ. For example, if the new rent were higher than the old rent, the amount brought into charge during overlap would not necessarily be nil.

Key takeaways

• Overlap relief prevents the same rental value being charged to SDLT twice when an old lease is surrendered and replaced.
• If the old rent is higher than the new rent during the overlap period, the rent counted for the new lease can be reduced to £0 for that period, but not below £0.
• Where the overlap ends part-way through a lease year, the rent for that year must be apportioned manually if necessary.

This page was last updated on 24 March 2026

Useful article? You may find it helpful to read the original guidance here: Example of Overlap Relief Calculation for Lease Agreements with Different Terms

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