Understanding Rollover Relief
Rollover relief is designed to help businesses reinvest proceeds from the sale of certain assets without facing an immediate tax liability.
The Basics of Rollover Relief
When you sell a qualifying trading asset, the default position is that any capital gain or loss becomes immediately subject to capital gains tax (CGT). However, rollover relief allows you to defer the taxable gain if you reinvest the proceeds in a replacement qualifying trading asset.
The deferred gain reduces the base cost of the replacement asset, which means the gain will only be taxed when the replacement asset is eventually disposed of.
Where a trader has more than one trade, for the purpose of rollover relief, all the trades are considered as ONE!
This means a trader could dispose of an asset from one business, and rollover the gain onto to the replacement asset of the second trade.
For Gains Group companies, rollover can be claimed. Under these rules, so long as the replacement asset is acquired by a Gains group member, the rollover relief can be claimed, even if the company acquiring the replacement was not a member of the group when the gain arose.
Since 6 April 2019, the eligibility for group rollover relief has expanded. Gains made by non-resident group companies from the disposal of UK land and buildings, provided these are used for the purposes of trade, now also qualify for this relief.
Key Conditions for Rollover Relief:
1. Qualifying Assets
Qualifying business assets, as set out in TCGA 1992 (s.155), include:
- Land and buildings.
- Fixed plant and machinery.
- Ships, aircraft, and hovercraft.
- Satellites, space stations, and spacecraft.
- Goodwill.
- Milk and fish quotas.
2. Timing of Reinvestment
- The replacement asset must be purchased within 12 months before or 36 months after the disposal of the old asset.
- The replacement asset must also be brought into use for trading purposes immediately.
3. Partial Reinvestment
If the full proceeds from the sale of the old asset are not reinvested, partial relief is available. Any proceeds not reinvested will become chargeable to CGT capped at the original gain on the date of disposal.
4. Depreciating Assets
If the replacement asset is a depreciating asset (such as one that will become a wasting asset within 10 years of purchase), the gain is not deducted from its base cost. Instead, the gain is “frozen” and deferred for up to 10 years or until one of the following occurs (whichever is earlier):
- The depreciating asset is sold.
- The asset is no longer used for trading.
- Ten years pass from the date the replacement asset was purchased.
If a qualifying non-depreciating asset is purchased during this period, the frozen gain can be rolled over to reduce the base cost of the new non-depreciating asset.
Mixed-Use Assets
If either the qualifying asset being disposed of or the replacement asset is partly used for non-trading purposes, the relief is restricted. For example, if only 70% of an asset is used for trading, 70% of the gain may qualify for rollover relief. The remaining 30% would be chargeable.
The apportionment can be based on factors such as:
- Floor space.
- The duration the asset was used for trading versus non-trading activities.
How to Claim Rollover Relief
An election to claim rollover relief must be made within four years from the later of:
- The end of the tax year in which the old asset was sold.
- The end of the tax year in which the replacement asset is acquired.
Rollover Relief for Intangible Fixed Assets (IFAs)
For assets such as intellectual property (e.g., patents, trademarks, registered designs, copyright, and goodwill), the rules differ slightly:
1. Tax Treatment
Profits or losses on the disposal of IFAs give rise to taxable income gains or losses, rather than capital gains.
2. Reinvestment Conditions
- Rollover relief can be claimed by reinvesting proceeds from the sale of an IFA into the purchase or creation of another IFA.
- The new IFA must be purchased within 12 months before or 36 months after the sale of the old IFA.
3. Tax Calculations
- The relief is calculated by deducting the tax written down value of the old IFA from the proceeds reinvested.
- Any proceeds not reinvested, plus previously claimed amortisation, will result in a taxable income gain.
4. Base Cost Adjustment
The base cost of the new IFA is reduced by the amount of rollover relief claimed. This will result in lower amortisation deductions prospectively.
5. Partial Reinvestment
If only part of the proceeds is reinvested, the available relief will be restricted.
Practical Examples
Here are some examples to solidify understanding:
Fully Reinvested
If a qualifying asset is sold for £100,000 and the full proceeds are reinvested in a new qualifying asset, the CGT gain is deferred entirely. The gain reduces the base cost of the replacement asset.
Partially Reinvested
If only £70,000 of the £100,000 proceeds is reinvested, £30,000 becomes immediately chargeable to CGT. The remaining gain is deferred and applied to reduce the base cost of the replacement asset.
Depreciating Asset
If the £100,000 proceeds are reinvested into a depreciating asset, the £100,000 gain is frozen and deferred. It will become chargeable in the future if specific conditions (stated earlier) are met.