Reinvesting in your business? How rollover relief can help manage Capital Gains Tax
When a business sells an asset such as property, land or equipment, the resulting gain can trigger a Capital Gains Tax (CGT) liability.
However, if the proceeds are reinvested into new business assets, it may be possible to defer that tax through rollover relief.
This is because instead of paying tax on the gain immediately, the gain is deducted from the cost of the new asset.
This means the tax is effectively postponed until the replacement asset is sold in the future.
For many businesses, this relief supports growth by allowing funds to be reinvested rather than immediately used to pay tax.
Understanding how rollover relief works can help business owners make informed decisions when replacing or upgrading key assets.
Key conditions for claiming rollover relief
To qualify for rollover relief, certain conditions must be satisfied:
- The taxpayer must dispose of a qualifying asset that has been used solely for the purposes of a trade during the period of ownership.
- The proceeds from the sale must then be reinvested into another qualifying asset which is brought into use for the trade.
- The replacement asset must normally be acquired within a defined reinvestment period. This begins 12 months before the disposal of the original asset and ends three years after the disposal.
Provided the new asset is purchased within this timeframe, HMRC generally assumes that the disposal proceeds were used for the reinvestment.
If the transaction takes place between connected parties, the disposal proceeds will usually be treated as the market value of the asset.
Which assets qualify?
Not all assets are eligible for rollover relief. The relief applies to certain types of assets used in a trade.
Qualifying assets include:
- Land and buildings occupied and used for the purposes of a trade
- Permanent or semi-permanent trade structures
- Fixed plant or machinery that does not form part of a building
- Ships aircraft and hovercraft
- Goodwill in some circumstances
- Agricultural quotas and entitlements
- Fishing quotas
- Certain specialist assets
Be aware that shares and securities do not qualify for rollover relief.
Trading use of the assets
Both the original asset and the replacement asset must be used for the purposes of a trade.
For example, where land or buildings are involved, the property must be occupied as well as used for trading activities.
The replacement asset must also be used for the trade as soon as possible after acquisition.
If a short delay occurs because alterations or improvements are required before the asset can be used, HMRC may accept this provided the asset is not used for another purpose during that time.
For sole traders, the replacement asset does not have to be used in the same trade as the original asset.
Successive or concurrent trades are normally treated as a single trade for the purposes of the relief.
When the relief may be restricted
Rollover relief is most effective when the entire disposal consideration is reinvested in new qualifying assets.
If only part of the proceeds is reinvested, the amount of the gain that can be deferred will usually be reduced. Relief may also be restricted in situations such as:
- Where an asset was only used for trading purposes during part of the ownership period
- Where only part of a property is used for trade
- Where the replacement asset has both trading and non-trading uses
In these cases, the gain must be apportioned on a reasonable basis.
Depreciating assets
Special rules apply where the replacement asset is a depreciating asset. These are assets with a predictable useful life of 60 years or less, which often includes certain plant and machinery.
Where reinvestment is made into a depreciating asset, the gain is not deducted from the cost of the asset. Instead, it is deferred and effectively frozen.
The deferred gain will crystallise when one of the following events occurs:
- The asset is sold
- The asset stops being used for the trade
- Ten years pass from the date of acquisition
If another qualifying asset is acquired before the frozen gain crystallises, it may be possible to roll the gain over again.
Rollover relief within company groups
Groups of companies can also benefit from rollover relief. If one group company disposes of an asset and another group company acquires the replacement asset, the transactions can be treated as though they were carried out by a single entity for CGT purposes.
A capital gains group typically consists of a parent company and its effective 51 per cent subsidiaries.
The companies only need to be members of the group at the time the disposal and acquisition take place.
This can be useful where investment decisions are made across multiple companies within the same group structure.
Making a rollover relief claim
A claim for rollover relief must be submitted within four years of the later of:
- The end of the tax year or accounting period in which the disposal occurred
- The end of the tax year or accounting period in which the replacement asset was acquired
Claims are made in writing and must include key details such as the assets involved, the dates of disposal and acquisition and the amounts reinvested. Individuals may also use the claim form provided in HMRC Helpsheet 290.
If you are planning to sell and replace business assets, seeking professional advice early can help ensure that you meet the conditions for relief and make the most tax-efficient decision for your circumstances. To find out how we can help, get in touch.
