HMRC SDLT: SDLTM19330 – Reliefs and exemptions: Overlap relief: Example 4

Overlap Relief: Example 4

This section of the HMRC internal manual provides guidance on overlap relief, specifically through Example 4. It explains the principles and concepts of overlap relief, which is a tax relief available to businesses. The document is intended for internal use by HMRC staff.

• Overlap relief helps businesses avoid double taxation.
• Example 4 illustrates a specific scenario for applying overlap relief.
• The guidance is part of a broader HMRC manual on tax reliefs and exemptions.
• It provides detailed calculations and considerations for HMRC staff.

Understanding Overlap Relief in Stamp Duty Land Tax

What is Overlap Relief?

Overlap relief is a type of relief you can claim when you get charged Stamp Duty Land Tax (SDLT) on two properties that involve the same transaction. It helps you avoid paying taxes twice on the same element of a property deal involving two purchases or leases.

Here are some key points about overlap relief:

– It is relevant if you have a transaction that spans two different properties.
– The benefit of this relief is to prevent double taxation on the same aspect of a property transaction.
– It can apply to various situations, including buying a new property while still owning the old one.

Who Can Claim Overlap Relief?

Certain conditions must be met for you to claim overlap relief. You need to be involved in transactions where:

– You own a property that you have purchased.
– You are about to buy another property.
– The previous property has not yet been sold by the time the new one is acquired.

This situation can happen frequently in property trading, especially during times of transition like upsizing or downsizing.

Example of Overlap Relief

To illustrate how overlap relief works, let’s consider an example.

Scenario:
You own a flat that you purchased in 2010 for £200,000. In 2020, you find a house you would like to buy for £300,000.

You decide to purchase the new house without selling your flat immediately because you want to move in right away.

Transactional Details:

– The flat’s current market value is now £250,000.
– You will need to pay SDLT on the new house purchase, which according to current SDLT rates generates a tax of £5,000 (assuming standard rates apply).
– However, you also own a flat that you have not yet sold, which means the previous property transaction also incurs SDLT.

In this situation, since you have not disposed of the flat, you can apply for overlap relief when calculating the SDLT due on the new house.

Here’s how you would work it out:

1. You establish that the flat was valued at £250,000 at the time of the new house purchase.
2. Since you have been charged SDLT on the flat and are now acquiring a new property, you can deduct the amount of SDLT that relates to the flat from the total tax due on your new house.
3. Let’s assume the SDLT on the flat is £1,500.
4. You can then deduct this amount from the total SDLT due for the new house, resulting in a new tax bill of £3,500.

How is Overlap Relief Calculated?

To calculate overlap relief accurately, follow these steps:

– Identify Tax Charged on Each Property: Determine how much SDLT has already been paid on the previous property you own.
– Assess the New Property SDLT: Calculate the SDLT amount that would be owed on the new property acquisition.
– Deduct Previous SDLT: Subtract the SDLT already paid from the SDLT liability on the new property.

When to Claim Overlap Relief

You should claim overlap relief at the same time you submit your SDLT return for the new property. This is vital because any delay in submitting your return or claiming relief could potentially lead to penalties or interest charges.

Make sure to provide all relevant information about the previous property transaction, including:

– Date of purchase
– Value of the property
– SDLT amount already paid

Record Keeping for Overlap Relief

It is essential to keep thorough records concerning claims for overlap relief. Here are some documents you may want to maintain:

– Copies of the SDLT returns for both properties.
– Valuation documents that indicate the market value of both the old and new property.
– Any correspondence with HMRC regarding your property transactions.

Strong documentation is key to substantiating your claim in case of any inquiries by HMRC.

Important Notes on Overlap Relief

Here are additional points to consider when dealing with overlap relief:

– Overlap relief can only be claimed once per currently owned property.
– If you later dispose of the previous property, you will not be eligible for overlap relief on any subsequent transactions related to both properties.
– Ensure that the properties in question are treated as part of the same transaction as this is pivotal for claiming relief.

Additional Considerations

Keep in mind that while overlap relief provides tax benefits, specific rules govern the transactions eligible for this relief. It is advisable to seek proper financial advice or consult a professional familiar with SDLT regulations if you are unsure about your application.

Here are some factors to consider:

– The timing of purchasing or leasing your new property.
– The structured nature of property transactions and the relevance of closings on different dates.
– Awareness of SDLT rules that could affect your transactions beyond just overlap relief, including any changes due to legislative updates.

Conclusion

When navigating property transactions, particularly involving the acquisition of multiple properties simultaneously, understanding overlap relief can save you money by avoiding unnecessary double taxation. Always remember that accurate record-keeping and timely submission of your SDLT return plays a significant role in ensuring you benefit from the relief effectively.

Stay informed about differences in property transaction taxes across the UK, such as transitions to Land and Buildings Transaction Tax in Scotland following changes in legislation. Consult with a professional if you have any complicated transactions or unique circumstances that may affect your eligibility for overlap relief.

Useful article? You may find it helpful to read the original guidance here: HMRC SDLT: SDLTM19330 – Reliefs and exemptions: Overlap relief: Example 4

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