Meg Saksida continues with the theme of efficient investments for capital gains tax and considers the details of rollover relief.
Rollover relief is a relief available for capital gains made on business assets sold by traders such as sole traders or partnerships and includes those in furnished holiday letting businesses. This article focuses on unincorporated businesses, but the relief is also available to companies.
The relief can also be used for sales by individuals if the business asset is being used in a company in which they have at least 5% of the voting shares. If an individual has more than one trade (e.g. if they have two sole trader businesses) they can rollover a gain on one trade to a purchase of an asset in their other trade.
What does rollover relief do?
Rollover relief, sometimes called ‘replacement of business assets’ relief, is a form of deferral for capital gains tax (CGT) purposes. Rather than a trader having to pay CGT on a gain on the sale of a business asset immediately, if the original asset is replaced with another business asset to be used in the trade, it is possible for the gain to be deferred until such time as that replacement asset is sold.
Unlike gift relief, rollover relief does not change the identity of the taxpayer of the gain, but it does change the timing of the payment, which moves from the date of the sale of the original asset to the date of the sale of the replacement asset. The replacement needs to be acquired within one year before and three years after the sale of the original asset, although with the approval from HMRC this window could be extended.
Why is it required?
When a business is trading, it will need to upgrade or replace assets occasionally. It is not convenient or conducive to efficient business practice for the trader to incur a CGT charge every time they sell and replace their business property.
Rollover relief allows the trader to put the CGT liability out of mind until they sell an asset that they are not immediately replacing.
What qualifies?
Not all assets qualify for rollover relief. The detail is in the legislation, but the most common qualifying assets are land and buildings, aircraft, goodwill, and fixed plant and machinery.
If the trader were a farmer, for instance, they could claim rollover relief on a new milking parlour but not on a new combine harvester, which would be movable machinery. More unusual qualifying assets include space stations, satellites, and hovercrafts!
The replacement asset does not need to be the same type of asset as the original asset, so a building could be replaced with an aircraft and still be eligible.
Entrepreneurs’ relief
It may not be in the trader’s best interests to roll over the gain.
For example, if the current gain would be eligible for entrepreneurs’ relief, but any future gain would not be, it may be better to pay the gain at the time of the sale of the original asset.
Practical tip
Rollover relief requires a claim, so does not happen automatically. The claim must be made within four years of the end of the tax year in which either the gain arises on the original asset, or the replacement asset is purchased, whichever is later. Provisional claims are available to defer the gain even if the new assets have not yet been purchased at the time the CGT would be normally due.
