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1 Minute Guide to ... Rollover Relief
(August 2004)
Introduction
An important relief from tax on capital gains is 'rollover' relief on the replacement of business assets. Questions on the relief have been raised in the Tax Tips Forum on TaxationWeb from time to time, so this '1 minute guide' outlines some of the key features of rollover relief.
10 Key Points
- What is rollover relief?
A capital gain on the disposal of certain types of asset used in the taxpayer's trade may be deferred (i.e. 'rolled over') if the proceeds are reinvested in new qualifying trading assets. The gain is deducted from the base cost of the new asset, and becomes chargeable on the disposal of that replacement asset, subject to possible further rollover claims.
- Who can claim the relief?
The relief is available to individuals, trustees and personal representatives. Companies can also claim rollover relief, although there are different rules for rollover relief on goodwill and other forms of 'intangible assets' for corporation tax purposes from 1 April 2002.
- Which types of asset qualify?
The most common types of qualifying assets are land and buildings occupied and used for the purposes of the trade, fixed plant and machinery and (in the case of individuals) goodwill. A list of qualifying assets is contained in the tax legislation (Taxation of Chargeable Gains Act 1992, s 155). For companies, separate rules apply to rollover relief on goodwill and other 'intangible assets' (see 2 above). Among the less common categories of qualifying asset for rollover relief purposes are satellites, space stations and spacecraft! Rollover relief also is available for assets used for the commercial letting of furnished holiday accommodation, if certain conditions are satisfied.
- How much needs to be reinvested?
Full relief is available if the whole proceeds from the original asset are reinvested in the qualifying replacement asset. If only part of the proceeds is reinvested (i.e. if the amount paid for the replacement asset is less than the proceeds from the original asset), the difference represents an immediately chargeable gain. If the amount not reinvested is greater than the gain, no rollover relief is due.
- Is there a time limit for acquiring the replacement asset?
Yes. The new asset must be acquired within 1 year before to 3 years after the disposal of the old asset. However, the Inland Revenue may extend this time limit at their discretion, e.g. if there is a clear intention to acquire a replacement asset.
- How is rollover relief claimed?
The claim is usually made with the Self Assessment return for the tax year (or accounting period, for companies) in which the disposal of the old asset takes place. The Inland Revenue has produced a Helpsheet (IR290 'Business Asset Roll-Over Relief') to enable individual taxpayers to claim the relief. The Helpsheet and claim form can be downloaded from the Revenue's website: www.inlandrevenue.gov.uk/helpsheets/ir290.pdf
- What is the time limit for claiming rollover relief?
The time limit for rollover relief claims by individuals, trustees and personal representatives is 5 years from 31 January following the end of the tax year to which the claim relates (i.e. 5 years 10 months after the end of the relevant tax year). For companies, the time limit is 6 years from the end of the accounting period to which the claim relates.
- Provisional claims
The reinvestment time limit of 3 years after disposing of the old asset (see 5 above) means that the due date for filing the tax return and paying tax on the original gain may precede the reinvestment. A provisional relief claim can therefore be made as part of the tax return. The effect of a provisional claim is to defer the gain until replaced by an actual claim, or until it ceases to have effect 3 years from 31 January following the tax year of disposal (or for companies, 4 years from the end of the accounting period of disposal).
- Rollover relief and taper relief
Rollover relief is given before taper relief. This means that any taper relief is effectively lost on the gain rolled over in respect of the old asset, unless the replacement asset is a 'depreciating asset' (see below). Taper relief on the replacement asset is based on the ownership period of that asset, unless a further rollover relief claim is made (note that taper relief applies to the gains of individuals, not companies).
- Depreciating assets
A depreciating asset is broadly an asset with an estimated useful life of 60 years or less. If the replacement is a depreciating asset, the 'rolled over' gain cannot be deducted from the cost. The gain (after any taper relief) is instead 'held over (i.e. postponed) for a maximum of 10 years, or if earlier until the replacement asset is sold or ceases to be used in the trade.
Disclaimer
The content of these guides is based on tax legislation in operation at the time of publication, which may subsequently have changed. Whilst every care has been taken in its production, no responsibility can be accepted for any action undertaken or refrained from as a consequence of this material. This information is for general guidance only. Specific professional advice should always be obtained based on personal circumstances. TaxationWeb Limited accepts no responsibility whatsoever for any action undertaken or refrained from as a result of the information contained herein.