Rollover relief – how does it work
There is a capital gains tax (CGT) charge when a chargeable asset is sold at a gain (subject to the individual personal allowance for an individual). However, postponement of the gain may be possible should ‘rollover relief’ be available.
Rollover relief can be claimed where trading assets are sold, and new assets purchased within a set timeframe using the proceeds or the equivalent amount of proceeds if the asset is given away. This relief can be claimed by both individuals and companies. Rollover relief allows CGT to be deferred on the sale of a business asset when replacing it with another business asset within a period commencing one year before and ending three years after disposal.
Under this relief, the allowable cost of acquisition and any other expenditure of the new asset is reduced by the amount of gain on the old asset. That means that when the new asset is eventually sold two sets of capital gains will come into charge.
Rollover relief can be claimed where the business is:
- trading, including carrying on a business of Furnished Holiday Let;
- occupying and managing commercial woodlands to make a profit;
- carrying on a profession, vocation, office or employment;
- making a personally owned asset available to a personal company; and
- disposing of land by a compulsory purchase.
The assets don’t have to be the same type but must be used only for the trade. There is no requirement to invest the actual sale proceeds into the asset purchased as long as an amount equal to the disposal proceeds is used. However, if only part of the sale proceeds is used, the unused part is chargeable immediately.
Provisional claims are available
HMRC may allow provisional relief where the original asset has been sold and the trader plans to reinvest the proceeds in a new asset in the future. When the reinvestment takes place, the actual claim replaces the provisional claim.
However, if reinvestment doesn’t happen within three years from 31 January following the tax year of disposal the provisional relief will be cancelled.
Asset not used in business
If the asset is acquired but not taken into the business within the timescale, a claim may still be possible providing:
- the expenditure is incurred for the purpose to enhance the asset’s value.
- any work arising from such expenditure begins as soon as possible after acquisition and is completed within a reasonable time.
- on completion of the work, the asset is taken into use in the trade and no other purpose.
- the asset is not let or used for any non-trading purpose in the period between acquisition and the time it is taken into the trade.
Should the original asset only be used in the business for part of the time of ownership the acquisition and proceeds are apportioned into business and non-business use on a timeline basis. Therefore, only the part relating to the time used in the business can qualify for relief.
The time limit for a claim is 4 years from the end of the accounting period to which the claim is related for companies and from the end of the tax year for individuals.
Rollover relief is not available where replacement assets are acquired to make a profit on sale. A similar relief, known as ‘holdover relief‘, is available where the replacement asset is a depreciating asset.
For more information about Rollover relief, please visit the official government website.