What Relief(s)! Rollover & Holdover Relief

Capital gains tax (CGT) holdover and rollover reliefs have been with us a long time, and so every tax practitioner should ‘know the ropes’, but as always with tax there are hidden nooks and crannies in the rules, and of course every assignment is different. For those who may be a bit rusty or new to these topics, this article rehearses a few basics.

The above is the heading to TCGA 1992, s 165, which, for a start, is a misnomer as s 165 potentially applies to any transfer at less than market value, not just to ‘gifts’ as such. The asset in question must either:

a) be used for the purposes of a trade, profession or vocation carried on by the transferor or his ‘personal company’ or a member of a group, the holding company of which is his personal company, or 

b) consist of shares in a trading company or the holding company of a trading group, which is either unlisted or the company is the transferor’s personal company.

Shares in a listed trading company could qualify under b) above, but since the ‘personal company’ test requires that the transferor holds at least 5% of the company’s share capital and voting rights, this is somewhat unlikely.

Clearly, s 165 is trade-oriented, and therefore cannot apply to assets used in a property business or to shares in a non-trading company. Where an asset is not used for the purposes of the trade for the whole period of ownership, or is only partly used for the purposes of the trade, partial relief is available. In those circumstances, the gain which may be held over is reduced, respectively, on a time basis or by making a ‘just and reasonable’ apportionment.

Relief may also be restricted where there is partial consideration.

Fred is a sole trader carrying on a trade of wholesale butchers. He bought the trading premises many years ago for £50,000 and the property is now worth £200,000 but there is a mortgage of £75,000 secured on it. Fred transfers the business to his son Will, on condition that Will repays the mortgage and agrees to sign a joint election under s 165. 

The gain on disposal of the premises is £200,000 - £50,000 = £150,000, but because Will gives consideration of £75,000 which exceeds Fred’s original cost, the held over gain is restricted by the excess. The held-over gain is therefore £150,000 - £25,000 = £125,000, Fred is liable to CGT on £75,000 - £50,000 = £25,000 and Will’s cost for CGT purposes is £200,000 - £125,000 = £75,000 (i.e. the consideration given).

Fred will, of course, qualify for entrepreneurs’ relief (ER) at the 10% rate because he has made a ‘material disposal’ of business assets either in the form of the whole or part of a business or an asset used in the business at the time the business ceased to be carried on (by Fred), for the purposes of the ER rules (TCGA 1992, s 169I(2)(a) or (b)). 

Where the asset transferred consists of shares, these must be in a ‘trading company’ or ‘holding company of a trading group’. These terms are defined by s 165A, and apply both for the purposes of holdover relief under s 165 and for ER. 

Where the company carries on some non-trading activities, this could prejudice the relief by reference to HMRC’s rule of thumb of regarding non-trading activities as ‘substantial’ if they exceed 20% by reference to a number of factors (see HMRC’s Capital Gains manual at CG64090). It would appear that HMRC are reasonably relaxed about surplus cash, but it may be advisable in cases of doubt to apply for confirmation of the company’s status using HMRC’s non-statutory clearance service (www.gov.uk/guidance/non-statutory-clearance-service-guidance). 

As many readers will be aware, if a person disposes of a chargeable asset used for the purposes of their trade, and reinvests the proceeds in the purchase of other assets (falling within the classes of assets listed at TCGA 1992, s 155), the gain on the ‘old’ assets may be rolled over against the cost of the ‘new’ assets. The ‘window’ allowed for reinvestment commences one year before and ends three years after the disposal of the ‘old’ asset (though HMRC have discretion to extend the time limit – see CG60640). 

Section 152(1) requires that the ‘old’ assets were used ‘only’ for the purposes of the trade ‘throughout the period of ownership’. It has always struck me as slightly quirky that subsections (6) and (7) then deal with the consequences if they weren’t (but only as regards buildings and structures). The combined effect is as if a virtual part of the building were a separate asset, reflecting the extent of the business use of the property over time (see the example given by HMRC at CG60520).

However, s 152(1) does indicate that on acquisition the ‘new’ assets must be taken into use and used only for the purposes of a trade (subject to HMRC’s extra-statutory concession D24 where improvements are carried out after acquisition and the asset is brought into use as soon as possible afterwards).

Full rollover relief is available only where the whole proceeds of disposal of the old assets are reinvested in the new assets, but partial relief is available where the amount which is not reinvested is less than the gain. 

In the above example, if Fred had bought another building for £150,000 rollover relief would be restricted. He made a gain of £150,000 on proceeds of £200,000 which means that £50,000 of the gain has not been reinvested and remains taxable. The base cost of the new property is therefore £150,000 - £100,000 (the rolled over gain) = £50,000. 

It is worth noting that where a person carries on two or more trades either simultaneously or successively, s 152(8) treats them all as one trade, and this includes furnished holiday lettings which are treated as a trade for this purpose (see CG61450). 

It is also possible to claim relief against expenditure on depreciating assets incurred during the above timeframe (s 154). A ‘depreciating asset’ is a wasting asset with a predictable life of no more than 50 years – or which will become one in the next ten years. 

The gain is held over (not rolled over) until the earliest of the disposal of the asset, cessation of trade use, or ten years; unless a non-depreciating asset is acquired in the meantime, in which case a rollover relief claim can then be made. The class of assets at s 155 which is of most general relevance is Class 1, which is divided into Head A, basically buildings and structures, and Head B, ‘fixed’ plant and machinery which is not part of a building. A lease for less than 60 years would be regarded as a depreciating asset within Head A. However, a ‘fixture’ in a building such as central heating becomes in law part of the building. ‘Fixed’ in the sense used at Head B excludes mobile plant and machinery of any kind and means something like a production line or (as was held in one case) washing machines in a launderette (see CG60960). A claim under s 154 against fixed plant and machinery therefore very much depends upon the precise facts and, where relevant, a provisional claim under s 153A (see below) may be preferred. 

Rollover relief may also be claimed against the purchase of goodwill (Class 4 at s 155). However, for companies the intangible assets regime at CTA 2009, Pt 8 applies and gains taxable within TCGA 1992 cannot be rolled over against the cost of intangible assets (and vice versa). 

Rollover relief may be claimed (under TCGA 1992, s 153A) on a provisional basis where it is anticipated that the proceeds will be reinvested in new assets within the prescribed time-frame. Section 153A(1) requires a declaration specifying (among other things) the amount of the proposed reinvestment. Self-assessment Help Sheet 290 may be used for this purpose: for companies, calculations of any chargeable gains giving details of any claims and elections are required. A provisional claim ceases to have effect when it is superseded by a valid claim, withdrawn, or after a fixed period (see s 153A(5)).