Back to basics: Roll-over relief for business assets
Roll-over relief is a valuable relief for businesses but the legislation is complex in parts. Relief is available to defer gains on the sale of business assets where the proceeds are reinvested into new business assets (TCGA 1992 ss 152–157). Where the conditions are met this is a useful relief in planning and can provide valuable cash flow savings to businesses The amount of tax deferred depends on the amount of proceeds reinvested. The deferral is achieved by rolling the gain into the base cost of the new assets. While the concept of the relief is easily understood, the mechanics of obtaining the relief are complex. The rules are not entirely the same for individuals and corporates.
Roll-over relief is a valuable relief for businesses but the legislation is complex in parts. Paula Tallon examines some of the basic requirements and highlights some planning opportunities.
With the focus for many practitioners on changing legislation the availability of some old reliefs, particularly roll-over relief, is often overlooked in planning. Roll-over relief can take several forms but for the purposes of this article the focus is on business asset roll-over relief as set out in TCGA 1992 ss 152–157. This form of roll-over relief is available to defer gains on the sale of business assets where the proceeds are reinvested into new business assets. The amount of tax deferred depends on the amount or proceeds reinvested. The deferral is achieved by rolling the gain into the base cost of the new assets. The purpose of this article is to provide a practical guide to the relief and assist practitioners in avoiding the pitfalls and recognising the opportunities. All references are to TCGA 1992 unless otherwise stated.
Roll-over relief is a capital gains tax (CGT) concept so it is only relevant where the assets concerned are within the CGT net. There is a quirk with this where there are pre-2002 intangibles and this is covered later.
The six key conditions
There are broadly six conditions which should be present if a taxpayer is to obtain full roll-over relief.
- A person obtains consideration on the disposal of (or an interest in) assets;
- The person must be carrying on a trade as defined in ITA 2007 s 989 and s 158(1);
- The assets must have been used for the purposes of the trade throughout the period of ownership;
- The full consideration must be used to acquire new assets which are brought into use in the trade;
- The assets must be used only for the purposes of that trade and must be taken into use of acquisition; and
- Both the old and new assets must be within the classes listed in s 155.
There are special provisions where an individual holds an asset which is used for the purposes of a trade carried on by his personal company
A person for these purposes includes a company, an individual and trustees. The relief is extended to individuals holding assets used by personal companies and to employees. The latter can provide some planning opportunities.
Trade is given its income tax meaning for the purposes of relief which means that it includes ‘any adventure in the nature of a trade’. This means that it includes activities such as furnished holiday lets which are treated as trades for income tax purposes. The relief is extended in s 158(1) to include:
- Activities in carrying on the functions of a public authority;
- The commercial occupation of woodlands;
- A profession, vocation, office or employment;
- The activities of a non-profit making body where these activities are wholly or mainly directed to the protection or promotion of the trade or professional interests of its members;
- The activities of certain unincorporated associations and other bodies chargeable to corporation tax.
Whether a trade is being carried on has been tested in the Courts in numerous cases, and is the subject of an article in its own right so is not covered here.
The asset disposed of or the asset in which an interest is disposed of must fall within one of the classes listed in s 155. These are set out in Figure 1.
Classes 4 to 7A do not apply to companies. Instead, the intangibles rules in CTA 2009 Part 8 apply.
The old asset must be one of the classes listed above and must have been used solely for the purposes of the trade throughout the period of ownership. Where the asset has not been so used a degree of relief may be available. For buildings and structures, where for any substantial period of ownership the building had part trade and part non-trade use the relief is apportioned. Substantial is not defined for these purposes.
See Example 1.
Mechanics of roll-over
The gain for the taxpayer is calculated as if the disposal proceeds of the old asset is exactly equal to the allowable expenditure of the old asset. The acquisition cost of the new asset is reduced by the same amount. However, special rules apply where the new asset is a depreciating asset. A depreciating asset is defined in s 44 and includes an asset with a predictable life of 60 years or less. Where the proceeds are rolled into a depreciating asset the chargeable gain on disposal of the old assets is not deducted from the cost of the new assets, instead, is held over and is taxed when the new asset is disposed or the asset is no longer used for the purposes of the trade or if earlier the tenth anniversary of the acquisition of the new asset.
See Example 2.
The interaction with entrepreneurs’ relief (ER) should be considered. If the gain attracts ER the tax rate will be 10%, so if there is a possibility that the tax rate on a sale of the new asset would be higher the taxpayer may want to pay tax now with the benefit of ER.
Time limits for claims
The new asset must be acquired or an unconditional contract entered into in the period beginning 12 months before or ending three years after the date of disposal of the old asset. The Board of HMRC have the discretion to extend these time limits. Where the new asset was acquired not more than three years before or six years after the disposal of the old asset and there are acceptable reasons for the delay HMRC may by concession extend the time limits. HMRC give examples of acceptable reasons as:
- the threat of compulsory acquisition of the old asset;
- difficulty in disposing of the old asset;
- the acquisition of land with the intention of erecting a building on it; or
- the need to have new premises functioning before the old premises can be vacated.
The taxpayer must demonstrate that they had a real intention to acquire a replacement asset within the time limit but some fact or circumstance beyond their control prevented this and that they acted as soon they reasonably could.
Where the Board do not extend the time limit there is no right to appeal to the First-tier Tribunal.
Any interest on late paid tax runs from the original due date.
Roll-over relief where there is no consideration
Where deeming provisions apply on the acquisition of assets, s 152(10) applies to fix the deemed consideration before applying the roll-over relief. This will apply in the case of an
consideration is deemed to be the market value or in a group situation where the asset is acquired on a no gain no loss basis. Roll-over can be claimed where an asset is appropriated to trading stock (s 161) or where a capital sum is derived from an asset (s 22 or on a deemed acquisition of a qualifying asset).
Taking assets into use
Section 152 (1) requires the new asset to be ‘on the acquisition ... taken into use’ for the purpose of the trade. For newly constructed assets or enhancements to existing assets the date of acquisition is the date on which the asset or the works are completed and ready for use.
For assets acquired under contract the date of acquisition for CGT is the date of exchange so this would mean that in some cases it would be impossible to bring the asset into use on acquisition. In the case of Campbell Connelly & Co Ltd v Barnett (66 TC 380) Knox J observed that:
‘Although it leads to difficulties in reconciling [TCGA 1992 s 28] and [s 152], it seems to me that there is enough internal evidence in [s 152] to lead to the conclusion that the acquisitions being aimed at are completed acquisitions, not ones which still lie in contract.'
Practically, where an asset is taken into use as soon as is practical after acquisition that meets the condition for the relief.
Interestingly, there are no rules on how long an asset should be used in the business. This does provide some scope for planning if assets are acquired and a business ceases as the tax charge on the amount rolled over does not come into charge at that point.
Making a claim
The time limit for making the claim is four years. This runs from 31 January following the tax year of assessment for ITSA and from the end of the accounting period for CTSA. The time limit begins with the end of the year of assessment or accounting period in which the disposal takes place or in which the new assets are acquired, whichever is the later.
One of the main requirements for roll-over relief is that the consideration received from the disposal of the old asset has been applied in the acquisition of the new qualifying assets. This means that a claim cannot be made until the new asset has been acquired. However there are provisions for a provisional claim to be made (s 135A). The amount claimed on the return can be increased by amending the return but once the period for amending the return has passed the amount can only be withdrawn or reduced.
There are special provisions where an individual holds an asset which is used for the purposes of a trade carried on by his personal company. Section 157 provides that a gain accruing to an individual on the disposal of the old assets may be rolled over into the cost of new assets where both the old and new assets are used for the purposes of a qualifying activity carried on by the claimant's personal company and both old and new assets are used only by the same personal company. The company must be the claimant’s personal company both at the time of disposal of the old asset and the acquisition of the new asset. A personal company for these purposes is defined as one where the taxpayer has 5% or more of the voting rights. There is no requirement for the claimant to be an employee or officer of the company. There is no restriction where the company pays rent to the shareholder.
See Example 3.
Roll-over relief is available for assets used only for the purposes of an individual’s office or employment, s 158(1). HMRC has said that relief should not be denied because the asset is also used by the employer for the purposes of the employer's trade. The employer should not make any payment for the use of asset. This route could be used in cases where the personal company requirement is not met.
For companies with pre-2002 goodwill, the sale of this still falls within the CGT rules. However as intangibles for corporates are no longer within the CGT provisions the gain arising can only be rolled into new intangibles.
Paula Tallon, Managing Director, Gabelle LLP