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Hit the rollover jackpot
Juliet Smith explains all you need to know about rollover relief, a subject that is frequently tested
There are a number of reliefs available to mitigate capital gains: some exempt the gain, some defer the gain to a later date. Here we will cover a deferral relief called ‘rollover relief’, sometimes referred to as ‘Replacement of business asset relief’. (s.152 TCGA 1992)
How does rollover relief work?
Rollover relief allows a gain on the sale of a qualifying asset (the old asset) to be deferred if some or all of the proceeds are reinvested in a qualifying asset (the new asset).
For example, Bob runs a manufacturing business. He wants to relocate the business so he sells his old factory for £1,000,000 (it had originally cost £250,000). He then purchases a new factory in the new location for £1,000,000. The disposal of the old factory generates a capital gain for Bob of £750,000 (£1m – £250,000), on which capital gains tax is due. However, Bob has reinvested all the proceeds in the new factory, so how can he pay the tax? This is where rollover relief comes in – because Bob has reinvested all the proceeds from selling the old factory in the purchase of the new factory, rollover relief allows him to defer the gain. The gain is deferred by reducing the cost of the new factory to £250,000 (£1m – £750,000). This has the effect of deferring the gain until the new factory is sold because any reduction in the cost of an asset will increase the gain on its disposal.
When does rollover relief apply?
If an individual or company disposes of a chargeable asset used in their trade look out for them replacing that asset. In an exam question it is often a building such as an office or factory being sold and replaced, but remember there are a number of other classes of qualifying assets including:
• Fixed plant and machinery.
• Goodwill (individuals only).
• Ships, aircraft, hovercraft.
Note that the assets being sold and acquired do not need to be in the same class – for example, rollover relief could be claimed if a building is sold and a hovercraft is acquired.
Are the conditions met?
Once you have identified that there has been a sale of and purchase of a qualifying asset you need to check a couple of other conditions before you can be sure the relief will apply:
1. The new asset must be acquired either 12 months before the sale of the old asset, or in the 36 months after the sale of the old asset, and
2. The new asset must be immediately taken into use for the purposes of the trade.
How much relief is available?
The full gain will be deferred if:
• All the proceeds from the sale of the old asset are reinvested in the new asset, and
• Both the old and new asset are used 100% for trade purposes.
Returning to our earlier example of Bob, let’s assume that Bob acquired his new factory for £900,000 instead of £1,000,000. He would still have £100,000 cash left, this amount of gain is treated as immediately chargeable to capital gains tax. Bob would only be able to rollover £650,000 (£750,000 – £100,000) of gain.
If the old asset is not used 100% for trading purposes, then only the trading proportion of the gain qualifies for relief. Likewise, if the new asset is not to be used 100% for trading purposes only the trading proportion of its cost can be taken into account when deciding whether proceeds have been fully reinvested.
Lastly, if the new asset is ‘depreciating’ (useful life of 60 years or less or fixed plant and machinery) the gain to be deferred is not deducted from the cost of the new asset; it is instead ‘frozen’ and becomes chargeable on the earlier of:
• Sale of new asset.
• Trader ceasing to use the new asset in the trade.
• 10 years after purchase of new asset.
Rollover relief must be claimed by the sole trader (or company) within a certain time limit. The time limit for a sole trader is four years from the end of the tax year in which the gain arises or the new asset is acquired (whichever is later). For a claim by a company we refer to accounting periods instead of tax years.
• Juliet Smith is a senior tutor at Tolley Exam Training, part of Lexisnexis, and can be contacted at firstname.lastname@example.org.
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