CGT: Rollover Relief - www.rossmartin.co.uk

What is Rollover Relief? When a capital gain is made on the disposal of a business asset, it is possible to defer the gain by rolling it over against the cost of acquiring a replacement business asset. What are the conditions for the relief? What is a business asset?

A guide for subscribers.

At a glance

Capital Gains Tax (CGT) Rollover Relief is available to individuals and companies.

Rollover Relief allows a capital gain made on the disposal of a business asset to be deferred by rolling it over against the cost of acquiring a replacement business asset or assets.
Relief is restricted when the proceeds of the disposal of the first asset are not fully reinvested in the new assets.
Relief is also restricted where there has been partial trade use of an asset in terms of time or has, or will be, partial trade use of buildings in terms of space.
The new asset must be purchased within a four-year window, starting 12 months before disposal of the old asset and ending three years after.
Only certain types of assets qualify for relief, but the assets do not have to be of the same sort.
On death, gains rolled over are not charged to CGT.
The gain will be temporarily frozen, rather than rolled over if the new asset has a predictable life of 60 years or less.
A company may deduct the indexation allowance (up to 31 December 2017) before rolling over its gains.
The relief is extended to groups so that a gain made by one company can be rolled into the purchase of a qualifying asset by another group company subject to certain conditions.

Overview

Basic conditions

Rollover Relief is available to individuals or companies where they:

Dispose of 'old' qualifying assets (or an interest in qualifying assets) which are:
- Used solely for the purposes of a trade throughout the period of ownership.
Apply the disposal consideration to acquiring 'new' qualifying assets (or an interest in qualifying assets), which are:
- Taken into use solely for the purposes of the trade on acquisition.
- Acquired within the permitted reinvestment window (generally 12 months before and three years after the disposal of the old assets).

It is not necessary to 'trace' disposal proceeds. If the investment in new assets is made within the statutory time limit (see below), there is a presumption that the disposal consideration was wholly applied in acquiring the new assets. It is also unnecessary to consider loans outstanding in respect of the old assets or raised in respect of the new assets.

Where the transaction is between connected persons, the disposal consideration is deemed to be the market value of the asset disposed.

Qualifying assets

Both the old and new assets must fall within defined 'classes'. Both assets do not need to be within the same class.

The qualifying classes of assets are listed at s.155:

A building or any part of a building and any permanent or semi-permanent structure in the nature of a building occupied (as well as used) for a trade.
Any land occupied (as well as used) for the purposes of a trade.
Fixed plant or machinery which does not form part of a building or a permanent or semi-permanent structure in the nature of a building.
Ships, aircraft, hovercraft.
Goodwill. *
Space stations and space vehicles.
Milk quotas and potato quotas. *
Ewe and suckler cow premium quotas. *
Fishing quotas. *
Single Farm Payment (SFP) and Basic Payment Scheme (BPS) entitlements.

*The relief does not apply to intangibles falling within the FA 2002 Intangibles Regime (though that regime has similar rules).

Rollover Relief does not apply to the disposal of shares and securities.

Trade use

Both the old and new assets must be used for a trade. 'Trade' includes the occupation of woodlands on a commercial basis.

The new asset must be used for a trade purpose as soon as acquired. HMRC will, by concession (ESC D24), allow a short gap if improvements/alterations are required to the new asset and it is not used for any other purpose during that time.
A sole trader does not have to use the old and new assets in the same trade. Trades carried on successively, or simultaneously, are treated as a single trade for the purposes of Rollover Relief.
- For successive trades, HMRC take the view that there must not be a gap of more than three years and the reinvestment time limits must be met.

Restrictions to relief

Full relief is available where the net consideration (i.e. disposal proceeds after disposal costs) is fully reinvested. Example:

John disposes of Briar Cottage Tea Rooms for £400,000, making a capital gain of £150,000. Six months later he buys Sleepy Gables Hotel for £500,000. By claiming Rollover Relief he defers the £150,000 gain and is treated as acquiring Sleepy Gables for a base cost of £350,000 (£500,000 - 150,000).

Relief is restricted when the proceeds of the disposal of the old assets are not fully reinvested in the new assets.

Where the disposal proceeds are only partly used, the relief is restricted proportionately, provided that the amount not reinvested is less than the gain to be deferred. Example:

John disposes of Briar Cottage Tea Rooms for £400,000, making a capital gain of £150,000. He decides to buy a woodland with a fishing lake for £300,000, leaving £100,000 in the bank. As £100,000 is less than his gain of £150,000, he can rollover £50,000 of his gain (£150,000 - £100,000). This gives him a CGT base cost for the new land of £250,000. He will be eligible for Business Asset Disposal Relief (BADR) on the capital gain that is not deferred, providing that the BADR conditions are met.

Both the old and new assets must be used solely for the trade and no other purpose. The exception to this rule is in respect of buildings.

Where only part of a building is used for a trade, that part is treated as a separate asset, which can qualify for relief, with the remainder of the building not qualifying. This restriction can apply to both the old and new assets. Example:

John disposes of Briar Cottage Tea Rooms for £400,000, making a capital gain of £150,000. Six months later he buys Sleepy Gables Hotel for £500,000 which includes a small commercial unit worth £200,000, which he lets out. John can roll over £50,000 of his gain, with £100,000 remaining chargeable to CGT. This £100,000 is equal to the consideration not reinvested in the acquisition of the new qualifying asset.

An apportionment on a just and reasonable basis must be made where the old assets were used for qualifying purposes during part only of the period of ownership. This restriction applies to all assets, not just buildings. Example:

John disposes of Briar Cottage Tea Rooms for £400,000, making a capital gain of £150,000. He had owned the Tea Rooms for 12 years but had only traded from the premises for the final 8 years. During the first four years of John's ownership, the Tea Rooms were let to a third party. Six months later he buys Sleepy Gables Hotel for £500,000. John can roll over 8/12ths of his gain (i.e. £100,000), with the remaining 4/12ths (£50,000) remaining chargeable to CGT.

Time limit for reinvestment

The new assets must be acquired in a period that commences 12 months before the disposal of the old asset, or three years after.

HMRC may extend the reinvestment window where a taxpayer was prevented from acquiring the replacement assets by some fact or circumstance beyond their control. See CG60300.

Practical issues

Reinvestment can be made into more than one qualifying asset. In that instance, Rollover Relief can be allocated however the taxpayer chooses.

Relief can be claimed where the disposal is a deemed disposal, for example, where a capital sum is derived from an asset, or where an asset is appropriated from capital to stock. Relief can also apply to deemed acquisitions.

HMRC have agreed several Extra Statutory Concessions (ESCs) relating to Rollover Relief. These include:

ESC D16: HMRC will accept a claim for Rollover Relief where an asset was disposed of and, within the required time limits, the same asset was reacquired for commercial reasons.
ESC D22: Rollover Relief will apply when the proceeds of the disposal of the old asset are used to enhance the value of other trade assets, provided that they are immediately brought into use.
ESC D25: Rollover Relief is available where a taxpayer uses the proceeds from the old asset to acquire a further interest in another asset that is already in use for the purposes of the trade.

Note that a company may deduct the indexation allowance before rolling over its gains.

Depreciating assets

A depreciating asset is one with a predictable life of 60 years or less.

Fixed plant and machinery are depreciating assets unless they form part of a building as a fixture.

Where reinvestment is made into a depreciating asset, special rules apply:

The rolled-over gain is not deducted from the cost of the replacement asset.
Instead, the gain is ‘frozen’ until the earlier of:
- The sale of the replacement asset.
- The replacement asset no longer being used for trade purposes.
- Ten years from the acquisition of the depreciating asset.

If a non-depreciating qualifying asset is acquired before a frozen gain crystallises, the gain may be rolled over again against that new asset. This effectively extends the Rollover Relief reinvestment window, by temporarily freezing the gain against a depreciating asset.

Group Rollover Relief

A disposal by a company when it is a member of a Capital gains group, and an acquisition by another company when it is a member of the same group, are treated as made by the same person.
- For capital gains purposes a group is a company and its effective 51% subsidiaries meaning ownership may be indirect.
The trades carried on by group members are all treated as one single trade.
- If a non-trading group member disposes of or acquires assets that are only used in the trades of other group companies, relief is given as if the non-trading company were carrying on a trade.
Both companies need to claim the relief.
The companies do not need to be members of the same group throughout, only at the time of each company's relevant transaction (disposal or acquisition).

Assets held by individuals & used by partnerships or companies

An individual may claim Rollover Relief on assets they own which are:

Used by their personal trading company.
- A personal company is one in which the individual holds 5% of the voting rights.
Used by a partnership in which they are a member.

Where Rollover Relief is claimed on partnership assets the new assets don't have to be used in the partnership: they can also be used in a partner's sole trader business provided the conditions are met.

For assets used by an individual's personal company, the new asset has to be used by the same company as the old asset. Be careful with groups; there are special rules covering relief where the acquisition and disposal are by different companies in a group.

Should Rollover Relief be claimed?

Whilst Rollover Relief may seem attractive you should always consider whether deferring a gain is a good idea in practice.

In particular, it won't be beneficial where the disposal of the old asset qualifies for Business Asset Disposal Relief (Entrepreneurs' Relief) but the disposal of the new asset may not.

Examples of where a Rollover Relief claim is particularly beneficial include:

A farmer buys and sells farmland and the new land will be passed down on his death: the new land will be inherited at probate value so the rolled-over gain won't come into charge.
It is intended to sell the business in the next few years: Business Asset Disposal Relief (Entrepreneurs' Relief) may then be available on the rolled-over gain.
A loss is expected on the new asset: the rolled-over gain can be set against this loss.

Claiming Rollover Relief

Claims must be made within four years of the later of the end of the tax year (or company accounting period, as relevant) in which the:

Disposal took place.
New assets are acquired.

Claims must be made in writing and identify the:

Claimant and their Unique Taxpayer Reference.
Assets which have been disposed of.
Date of disposal of each of those assets.
Consideration received for the disposal of each of those assets.
Assets which have been acquired.
Dates of acquisition of each of those assets, or the dates on which unconditional contracts for the acquisition of each of those assets were entered into.
Consideration given for each of those asses.
Amount of the consideration received for the disposal of each of the specified assets that has been applied in the acquisition of each replacement asset.

Individuals can use the optional claim form produced by HMRC in Helpsheet 290.

Claims sent outside of a tax return should be signed by the taxpayer.

Tax tips

Rollover Relief applies to the disposal of assets that are Furnished Holiday Lettings (FHL). FHL assets can also qualify for Business Asset Disposal Relief (Entrepreneurs' Relief). Note that the FHL regime is due to be abolished in April 2025.
When proceeds are only partially invested, individuals can structure their claim for relief so that only part of the gain is rolled over. This will leave the unrelieved part of the gain to be set against the CGT annual exemption.
Remember that HMRC will extend the time limits for making this claim in exceptional circumstances; for example, when events outside their control mean that there is a delay in acquiring a new qualifying asset.
Where you intend to purchase a replacement asset but have not done so by the time you file the relevant tax return, a provisional Rollover Relief claim can be made. If this is not replaced by an actual claim within four years from the end of the accounting period in which the disposal took place, then the gain will become chargeable with interest due from the date the tax should have been paid.

Cases

Small print & links