At a glance
CGT Rollover relief is available to individuals and companies.
- A capital gain made on the disposal of a business asset is deferred by rolling it over against the cost of acquiring a replacement business asset.
- Relief is restricted when the proceeds of the disposal of the first asset are not fully reinvested in the new one.
- The new asset must be purchased within a four-year window, starting 12 months prior to disposal and ending three years after.
- The assets do not have to be of the same type.
- The gain will be frozen if the new asset has a useful economic life of 60 years or less.
- A company may deduct the indexation allowance (up to 31 December 2017) before rolling over its gains.
- Business Asset Disposal Relief (Entrepreneurs' Relief) cannot be deducted from a gain before it is rolled over.
- 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
Rollover relief: replacement of business assets s.152 TCGA 1992
The relief is available both to individuals and companies.
- A claim is made to defer the capital gain made on the disposal of a business asset by rolling it over against the cost of another business asset.
- Relief is restricted when the proceeds of the disposal of the first asset are not fully reinvested in the new one.
- The assets must be used solely for the purposes of the trade.
- They do not have to be of the same type of asset but must be listed within one of the classes found at s.155 (see below).
- A company may deduct the indexation allowance before rolling over its gains.
- The relief is found in s.152 to 158 TCGA 1992
Full reinvestment 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 gain and he is treated as acquiring Sleepy Gables for a base cost of £350,000 (£500,000-150,000).
Partial reinvestment example:
John disposes of Briar Cottage Tea Rooms for £400,000, making a 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 Entrepreneurs' Relief on the capital gain that is not deferred.
Qualifying conditions
- Both assets must be used for the purposes of a trade.
- 'Trade' includes the occupation of woodlands on a commercial basis.
- The new asset must be acquired in a period that commences 12 months before the disposal, or three years after.
- If the proceeds of the disposal are only partly used the relief is restricted proportionately, provided that the amount not reinvested is less than the gain to be deferred.
- Whilst the asset is to be used solely for trading purposes, partial rollover is available where:
- Part of a building is used for trading purposes. This can apply to the old and/or new asset. The cost should be apportioned to represent the trading element.
- The asset is not used in the trade for the whole time. The gain will be apportioned between trading and non-trading, with only the trading gain eligible for rollover.
- If the asset disposed of was not used only for a trade purpose after March 1982 the proceeds are allocated to trade and non-trade use on a time basis. If the full proceeds attributable to trade use are fully reinvested in a new qualifying asset the gain attributable to trade use can be rolled over.
- The new asset has to be brought into use for a trade purpose as soon as acquired. HMRC will by concession 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.
- By concession, the rollover will also apply when the proceeds of the disposal of the first asset are used to enhance the value of other trade assets, provided that they are immediately brought into use.
- A sole trader does not have to use the old and new assets in the same trade as 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.
- By concession, HMRC will also accept a claim for rollover where an asset was disposed of and, within the required time limits, the same asset was reacquired for commercial reasons.
Qualifying assets for rollover relief
These 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 the purpose of 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 of 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).
There are special rules for wasting assets (assets with a life of less than 60 years) that are normally exempt from CGT.
Rollover does not apply in respect of the disposal of shares and securities.
Depreciating assets
A depreciating asset is an asset with a useful economic life of 60 years or less.
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 further qualifying asset is acquired before a frozen gain crystallises, the gain may be rolled over again against that new asset.
Group rollover relief
- A disposal by a company when it is a member of a capital gains tax 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 own relevant transaction (disposal or acquisition).
Assets held by individuals & used by partnerships and companies
An individual may claim rollover relief on assets he owns which are:
- Used by his personal trading company (provided that he owns 5% of the share capital).
- Used by a partnership in which he is 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 actually 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.
Tax tips
- Rollover relief applies to the disposal of assets that are Furnished Holiday Lettings (FHL). FHL assets will also qualify for Business Asset Disposal Relief (Entrepreneurs' Relief).
- 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.
- 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 accouting 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
In Maurice and Shirley Bell v HMRC [2018] TC06575, taxpayers were unsuccessful claiming CGT rollover relief on the disposal of a farmhouse constructed on their farmland for their son. S.152 requires the new asset, on the acquisition, to be taken into use, and used only, for the purposes of the trade. The FTT found that whilst it was desirable to house the son in a building large enough to accommodate his family, the building was not essential for the trade. S.152 specifies that an asset is used only, for the purposes of the trade. This is a tight requirement.
In Pems Butler Ltd Rupert Butler Jenifer Butler v HMRC [2012] TC01769, rollover relief was claimed on the acquisition of a farm that was occupied by the company's directors as well as for the purposes of storing stock in trade. The claim failed: the building was not occupied, as well as used, only for the purposes of the trade.
In Shing Cheung Mak v HMRC [2013] TC02811, the taxpayer successfully claimed CGT business asset taper relief on the disposal of residential accommodation (a house) which was used for staff accommodation. Whilst business asset taper relief no longer applies this case is of interest from a CGT rollover relief and CGT Entrepreneurs' Relief perspective. For ER relief would only apply if the asset was disposed of as part of a material disposal of business assets.
