Rollover Relief

Q. I am looking at selling one of my business assets and I am going to replace it with another, and I heard about “rollover relief”, can you explain how this works?

A. Rollover relief is available for traders when they sell a business asset and replace it with another asset to be used in their business. The relief can defer the payment of capital gains tax on the disposal of the old asset.

The proceeds from the sale of the old asset are set against the original cost of this asset to arrive at the gain on the sale. This gain can then be reduced to nil, if rollover relief is claimed by the business. As this relief works as a deferral relief, the gain from the sale of the original asset is rolled over and set against the base cost of the new asset purchased.

Therefore, when the business comes around to selling the new asset in the future, as the base cost of this asset has been reduced by rollover relief, the capital gain on the sale of the original asset will be deferred until the sale of the new asset. This can be seen as a cash flow advantage for the business as they will not pay the capital gains tax on the sale of the original asset until the new asset is sold, possibly several years later.

If the sale proceeds from the sale of the original asset are not fully reinvested in the purchase of the new asset, the amount that is not reinvested will become chargeable to capital gains tax immediately. When the amount not reinvested into the new asset exceeds the gain on the sale of the old asset, the gain on the sale of the old asset will be chargeable to capital gains tax and no rollover relief can be claimed. 

Rollover relief is only available to traders who dispose of “qualifying assets”, and then reinvest the proceeds into another “qualifying asset”. The most common type of “qualifying assets” are land and buildings, goodwill and plant and machinery. The relief can only be claimed by businesses that are carrying on trading activities.

When purchasing the new asset, this must be acquired within a four year period, running from the 12 months prior to the sale and the 36 months after the sale of the old asset. These time limits may be extended at the discretion of HMRC. Rollover relief must be claimed by the business within four years from the end of the tax year in which the gain arises or the new asset is acquired, whichever is the later.

If an asset is used for both business and non-business use, only the business element will qualify for rollover relief and the non-business element will be charged to capital gains tax immediately.

There are a number of factors that should be consider in relation to all of the above, and detailed advice, taking into account individual circumstances, should always be obtained.

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