Rollover Relief

Rollover Relief

When capital gains tax was introduced in 1965, it was recognised that where a person sells an asset used in a business and buys a new asset, tax would be due on any gain arising on the sale, but there may not be any sales proceeds left over to pay that tax. To encourage modernisation and investment, a relief, popularly termed ‘roll-over relief’, was made available in certain circumstances.

The relief operates by deferring the gain on the ‘old’ asset until such time as there is a disposal of the ‘new’ asset, although on that disposal, if the conditions are satisfied, the gain on both the original ‘old’ asset and the ‘new asset’ may be deferred until the disposal of the second ‘new’ asset, and so on.

Although the legislation uses the term ‘new assets’, this does not mean that those assets must be new and previously unused; it simply means that they must be new to the taxpayer. By the same token, the term ‘replacement asset’ is often used but it is not a requirement that the new asset must be a replacement for the old one; the old and new assets may be different in character, provided both fall within any of the prescribed classes of qualifying assets. In this commentary, the term ‘new asset’ will be used to identify the asset which is acquired and onto which the gain on the old asset is rolled over.

How Does This Work

To qualify for relief, both the old and new assets must be ‘relevant’ business assets the required reinvestment must take place within a given time frame.

There is no requirement to ensure that the actual sale proceeds of the old asset are used for the purchase of the new asset. Indeed, as the new asset may be purchased before the disposal of the old asset, this would be impossible in such a case. All that is required is that an amount equal to the disposal proceeds is expended on the acquisition of the new asset. HMRC accept that the comparison to be made is between the net disposal proceeds (after allowable costs of disposal) and the cost of acquisition (including incidental costs).

In this context, the disposal proceeds include any consideration deemed to have been received on the disposal, e.g. the market value of the asset in the case of a disposal to a connected person and the market value of any non-monetary consideration.

Market value is the price that if you sold this asset on it own how much would you get for this.

The relief works by reducing the allowable cost of acquisition and other expenditure of the new asset by the amount of the gain on the old asset. Thus, on a disposal of the new asset an enhanced gain arises which comprises the gains on both assets.

Time Limit for The Claim

There is no specified time limit for the making of a claim and therefore the normal time limits apply. Individuals and trustees must claim within four years of the end of the year of assessment to which the claim relates.

Companies must claim within four years of the end of the accounting period to which the claim relates. For the extension of the time-limit in certain circumstances where there is a substantial delay between exchange of contracts and completion. Because a claim cannot be made until both a qualifying disposal and a qualifying reinvestment has occurred, the relevant tax year or accounting period is that in which the later of the acquisition or disposal occurs.

Partial Re-Investment

In order that the full amount of the gains on the old asset can be rolled over, an amount equal to the entire disposal proceeds of the old asset must be spent on the acquisition of the new assets.

However, part roll-over relief may be granted where the amount reinvested in new assets is less than the amount of the disposal proceeds. In such a case:

  1. the chargeable gain on the old asset is reduced to the amount by which the amount reinvested falls short of the disposal proceeds; and
  • the cost of acquisition of the new assets is reduced by the reduction in the chargeable gain at (1) above.

In other words, the amount reinvested is matched against the allowable cost of the old assets and only that part of the gain equal to any excess of the reinvestment is available to be rolled over.

If you need help or want more information on rollover relief, please contact us:

gary@cubicaccountants.co.uk

Call 07795 425032

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