Do you run a business where you’re frequently selling or disposing of business assets? Then this blog post is for you.
In the immortal words of Limp Bizkit’s Fred Durst in the year 2000, to get that tax relief you just have to “Keep on rollin’ baby.”
I’m sure he wasn’t referring to the gain on disposals of qualifying business assets but nonetheless, that’s exactly what you need to do to avoid paying the capital gains tax arising on the disposal of business assets.
What is Rollover Relief?
Rollover Relief is an HMRC scheme designed to allow sole traders, partnerships and limited companies to defer the gain arising on the disposal of qualifying business assets and here is how it works.
Reinvest the proceeds of the sale
When a trader disposes of a qualifying asset and then reinvests the proceeds of the sale into another qualifying business asset, the gain that has arisen on the sale can be used to reduce the base cost of the new asset and in this way, the gain will only crystallise upon the future sale of the asset.
John sells a buy-to-let property for £300,000 and makes a gain of £100,000. He reinvests the proceeds into a commercial building he intends to use as an office costing £350,000.
John has reinvested all the proceeds of the sale so the £100,000 gain is deferred and the new base cost of the office block for the purposes of Capital Gains Tax is £250,000 (£350,000 – £100,000).
Partial reinvestment of the proceeds of the sale
If we take the example above, but instead of reinvesting in an office block, John chose to reinvest in another non-depreciating asset, this time costing just £250,000. John has chosen not to reinvest £50,000 of his sales proceeds.
As a result £50,000 of the gain becomes subject to capital gains tax. The remaining £50,000 gain (£100,000 – £50,000) can be rolled over and used to reduce the base cost of John’s new asset.
The base cost for John’s new asset becomes £200,000 (£250,000 – £50,000).
There are some time constraints placed upon disposing and acquiring new qualifying assets as well as making the claim.
The new asset must be acquired no more than 36 months after the disposal of the old asset or up to 12 months before the sale of the asset.
Rollover Relief is not automatic and a claim should be made within four years of the end of the tax year in which the gain arises or the new asset is acquired. This in theory gives you up to seven years to make a claim.
To qualify for Rollover Relief both the new and old assets need to be qualifying business assets and the most common among these are:
- Land and buildings
- Plant and machinery
Depreciating Assets – When you can’t roll you have to freeze
If you reinvest the proceeds of the sale into a depreciating asset, (defined as having a useful economic life of 60 years or less) you cannot roll over the gain.
Instead, when reinvesting the proceeds of the sale into a depreciating asset the gain is frozen until the earliest of the following events:
- The disposal of the new asset
- The date the new asset ceases to be used in the trade
- Ten years from the date of the acquisition of the new assets
Jill sold a building for £150,000 and made a gain of £75,000. Twelve months later Jill invests in some fixed plant and machinery costing just £100,000.
Six years later the newly purchased plan and machinery cease to be used in the trade.
Because Jill has invested in depreciating assets she cannot rollover the gain, instead the full £75,000 is frozen and the base cost of the new acquired plant and machinery is unadjusted at £100,000.
Six years later when the assets cease to be used in the trade the £75,000 frozen gain becomes subject to capital gains tax.
Using Rollover and Holdover Relief to defer the payment of capital gains tax on the disposal of qualifying business assets is a great way to keep your cash working for you and not in the hands of HMRC.
To make the most of the relief and others like it be sure to consult a finance professional like us here at Linford Grey. Your intelligent friend. Your trusted advisor.