Individuals have a number of reliefs from Capital Gains Tax. Some of the reliefs include Roll-Over relief, Incorporation Relief, Gift Relief and Entrepreneurs relief. The different reliefs have different conditions that need to be met attached to them so you will need to look at these first in order to determine if you are entitled to any of the above mentioned reliefs. The different reliefs also have different implications to your liability and a brief description of each of the reliefs is given below:
- Roll Over Relief – defers tax on chargeable gains when a person disposes of a qualifying business asset and buys another
- Incorporation Relief – Applies when an individual transfers their business as a going concern to a company. Like rollover relief, the aim is to defer CGT arising.
- Gift relief – A wide ranging relief will allows claimants to defer any capital gains tax due.
- Entrepreneurs Relief – is a relief that is open to directors who own 5pc or more of a company, and which allows them to enjoy a 10pc tax rate on capital gains up to a lifetime limit. This compares with the 28pc rate of tax payable without the relief.
In this article, we look at Roll over relief. If you need more information on the other reliefs mentioned, click on the relevant links.
Roll Over Relief – How It Works
Roll Over relief defers tax on chargeable gains when a person disposes of a qualifying business asset and buys another. This relief is available to individuals, companies, trustees and personal representatives. The legislation for this relief can be found under s152 – 159 TCGA 92.
With roll-over relief, you can only make claims for assets which would give rise to a chargeable gain on disposal. If the asset is one that falls outside of CGT (i.e. a car), then relief will not be available. Have a look at this article (LINK) to see which assets are chargeable to CGT and which are exempt.
The two conditions for roll-over relief are as follows:
- The old asset (the one disposed off) has had to be used for the purpose of your trade, and
- The new asset acquired is used in the trade at acquisition.
As seen by the conditions, the assets acquired and disposed off have to be used wholly for the purpose of the trade – assets used party for the trade and partly for private purposes will not qualify.
Qualifying assets for roll-over relief
There are 8 classes of assets that qualify for roll-over relief. The classes are as follows:
- Any building or part of a building occupied and used for the purpose of the trade
- Land occupied and used for the purpose of the trade
- Fixed Plant and Machinery – The plant and machinery has to be FIXED to qualify for roll-over relief. The meaning of ‘fixed’ is not always obvious so there are 4 tests to assess whether plant and machinery is fixed. The tests are:
- In the context of the particular trade, the object is P or M as opposed to, for example, trading stock or part of a building
- The trader intends to hold the object in a particular location indefinitely for use in the trade.
- Whether the location of the object in a particular site is essential to its function in the trade
- The nature of the object’s means of permanent fixing.
- Ships, aircraft and hovercraft
- Satellites, space stations and spacecraft
- Farm quotas and Fishing quotas
- Various Lloyd’s assets
How Roll-over Relief is calculated
The roll-over relief calculation is relatively straightforward when you re-invest all their proceeds from the sale of the first asset into the second asset.
The disposal consideration for the old asset should be reduced to an amount that gives a no gain/no loss result and the amount of the reduction should be deducted from the cost of the new asset.
Say you bought your first shop for £100,000. You have now sold this shop for £120,000 and subsequantially bought a new, bigger shop for £150,000. The calculation will be as follows:
- Gain on first asset : £120,000 – £100,000 = £20,000
Ordinarily, you need to pay capital gains tax on this £20,000 but due to roll-over relief, your capital gains tax as this point is zero. You get roll-over relief up to the amount of the gain, so in this case, your roll-over relief is £20,000.
£20,000 relief – £20,000 gain = £0 CGT payable.
- As a consequence of claiming roll-over relief, you also need to reduce your acquisition cost of the new shop by the roll-over relief amount, for CGT purposes. Thus:
Acquisition cost of shop £150,000 – roll over relief £20,000 = £130,000 new acquisition cost.
Roll-over relief calculation on partial re-investment
If on the other hand you do not reinvest all your proceeds from the sale of the first asset into the second asset, you will not be able to claim the full amount of roll-over relief.
Say you bought your first shop for £100,000. You have now sold this shop for £150,000 and subsequantially bought a new shop for £95,000. The calculation will be as follows:
Find the Capital Gain you need to pay immediately. This amount is the lower of the gain (£150,000 – £100,000 = £50,000) or the amount not re-invested in the new asset (£120,000 – £95,000 = £25,000). As £25,000 is lower, this is the amount of capital gains you will have to pay now.
To find the amount of roll-over relief you can claim, the calculation is as follows:
Gain £50,000 – the amount charged immediately £25,000 = £25,000 Gain rolled over
You once again need to adjust the cost of the shop to take into account the roll over relief you have received. So
Cost of new shop £150,000 – Gain rolled over £25,000 = £125,000 new adjusted cost of shop.
Time Limits for roll-over relief
When considering roll-over reliefs, there are time limits for the acquisition of the replacement asset as well as a time limit to make a claim to HMRC.
Time limit for acquiring new asset – the new asset should be acquired in the period beginning 12 months before disposal of the old asset or ending 3 years after that disposal of the old asset.
The claim – The claim must be made within 4 years from the end of the relevant tax year. The relevant tax year is the later of the year in which the sale of the old asset took place or the purchase of the new one was undertaken