Rollover relief allows a trader to defer the payment of capital gains tax where the disposal proceeds of a business asset are reinvested in a new business asset. The deferral is achieved by deducting the chargeable gain from the cost of the new asset. It can be where proceeds are fully or partially reinvested.
Example 1 – proceeds fully reinvested
David sold a factory on 1January 2010 for £300,000 and this resulted in a chargeable gain of £80,000.
If David is replacing the old factory with a new factory costing £350,000, he can make a claim to defer the gain he has made.
The amount deferred (in this case £80,000) is rolled over and reduces the base cost of the new asset purchased. So the base cost of the new factory will be £270,000 (being cost of £350,000 less rolled over gain of £80,000).
Example 2 – proceeds not fully reinvested
Eve sells a business asset for £500,000 realising a capital gain of £100,000.
Eve uses the money to buy an office block used for the purpose of her trade which costs £480,000.
As Eve has not spent the entire sale proceeds, the cash retained of £20,000 (£500,000 less £480,000) is immediately chargeable to capital gains tax.
The remainder of the gain (£80,000) is rolled over into the base cost of the replacement asset. The base cost of the new asset is £400,000 (being amount paid £480,000 less gain rolled over £80,000).
Conditions for relief
Rollover relief can only be claimed by persons who are carrying on a trade as a sole trader or within a partnership.
If an individual carries on two trades, the disposal and acquisition do not have to occur in the same trade. So it is possible to make a gain on a disposal of an asset used in trade A and buy an asset used in trade B. For rollover relief purposes, both trades are regarded as one single trade.
The relief is also available if the person:
carries on a business of furnished holiday lettings
is occupying commercial woodlands and managing them commercially to make a profit
carries on a profession, vocation, office or employment
is providing an asset to his personal company (a company in which he is able to exercise 5% or more of the voting rights) which has been used in its trade.
Rollover relief can also be claimed by a company that sells an asset and reinvests the proceeds in a replacement asset.
The companies in a gains group are treated as a single entity for the purposes of rollover relief. This means that the gain on a qualifying business asset sold by a company in a gains group can be rolled over when a qualifying business asset is purchased by any company within the gains group within the qualifying period.
The new asset must be acquired within 36 months after the disposal of the old asset, or up to 12 months before the sale. These time limits can be extended at the discretion of HMRC.
The rollover relief is not automatic and a claim should be made within four years of the end of the tax year in which the gain arises or the new asset is acquired (whichever is the later).
Example 3 – time limit claim
Patricia sold a factory on 1 January 2016 (so financial year 2015/16) and, in the absence of a claim, the CGT on that gain will be due by 31 January 2017.
A roll over claim should be made by no later than 5 April 2020.
If Patricia has not bought the replacement asset by 31 January 2017 but is intending to do so before the three year anniversary period has expired, HMRC will allow her to defer the gain.
The new asset must be immediately taken into use for trade purposes.
To qualify for rollover relief, both the old asset and the new asset must be qualifying assets. The list of qualifying assets can be found in s.155 TCGA 1992. The most relevant types of qualifying asset are:
land and buildings
fixed plant and machinery
It is not necessary for the old asset and the new asset to be in the same category.
‘Fixed’ means immovable. Therefore, whilst the sale of a printing press will be eligible for rollover relief, the disposal of assets such as tractors, lorries and vehicles will not.
A ‘depreciating asset’ is any fixed plant or machinery or any asset which will have a life of 60 years or less from the date of acquisition.
If the new assets acquired are depreciating assets, relief is given by freezing the gain of the old asset until the earliest of the following:
the disposal of the new assets
the date the new assets cease to be used in the trade
10 years from the date of acquisition of the new assets
Example 4 – depreciating assets
Milana sold a building for £200,000 giving rise of a gain of £50,000. Milana immediately bought fixed plant and machinery for £180,000.
As Milana has not reinvested all of the proceeds in the new depreciable asset, she will have an immediate capital gain equal to the cash proceeds not reinvested of £20,000.
The remaining gain of £30,000 will be deferred. The gain is not rolled over against the base cost of the new asset, and so the base cost of the asset remains as £180,000. Instead, the gain of £30,000 is frozen.
Milana sells the new asset five years later for £195,000.
Her gain will be £15,000 (being £195,000 proceeds less cost of £180,000) plus the ‘frozen’ gain of £30,000, which crystallises on the disposal of the plant and machinery.
Depreciating assets and ‘parking’
If a gain is frozen on a depreciating asset and, before that gain crystallises, the trader purchases a non-depreciating asset, the frozen gain can be rolled over and set against the base cost of the new non-depreciating asset.
This relief allows the trader to ‘park’ the capital gain on a depreciating asset, until a non-depreciating asset is purchased.
Example 5 – Parking
Chris sold a building used in her trade in July 2000 for £300,000 giving rise to a gain of £50,000.
In March 2001, she reinvests £290,000 in a baking oven used for her cake making business.
As not all of the sale proceeds were reinvested, Chris will have an immediate capital gain tax on the cash retained of £10,000. The remaining gain of £40,000 is frozen.
This gain will crystallise either when the baking oven is sold, or in March 2011 (10 years from purchase).
In February 2010, Chris buys a factory for £500,000. Because the factory was acquired before the frozen gain became chargeable, the gain of £40,000 can be rolled over against the base cost of the factory. So the base cost of the factory is £460,000.
Accordingly Chris made a gain on the sale of a building in July 2000, and effectively rolled it over against a building that she bought in 2011 that is over 10 years since disposal.
The legislation that covers rollover relief is Taxation of Capital Gains Act 1992 (TCGA) s.152-162.HMRC has guidance in helpsheets, toolkits and its manuals. The toolkits provide a useful checklist to run through with clients.