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Taxation by Mark McLaughlin and Michael Dawson

A planning point on the interaction between non-residence and capital gains tax roll over relief is outlined in this case study by Mark McLaughlin ATII ATT TEP and Michael Dawson MA FCA ATII.In the second of three case studies on capital gains tax rollover relief, Mark McLaughlin ATII ATT TEP, Consultant, and Michael Dawson MA FCA ATII, Principal, of Forbes Dawson explain a planning point involving the interaction between non-residence and rollover relief.



Time has moved on since ‘Arthur’s good ‘result’’ (Taxation, 5 September 2002). Arthur could not resist the lure of the used car trade any longer, and eventually bought another used car showroom business. Despite setting out on this venture with the best of intentions, he soon acquired a reputation for “knocking out dodgy motors” (i.e. selling motor vehicles of questionable origin or mechanical condition). Arthur concluded that a period of absence from the UK might be in his best interests, to avoid having his “collar felt” (i.e. unwanted interest in his affairs by the police).



Consequently, after a year or two Arthur decided to sell the car showroom and retire to Canada to join his nephew Terry, who had moved there. However, two years after emigrating, Arthur discovered that retirement was not really to his liking (particularly since this meant having to spend more time with ‘‘er indoors’). So he reinvested the proceeds from the car showroom in acquiring a used car sales business in Canada. Arthur had paid a substantial capital gains tax liability from the sale of the UK business, on the basis that no further rollover relief opportunities would arise following his retirement. He asks whether he can now roll over the gain from the sale of the UK car showroom into the Canadian business assets (i.e. a property, plus related goodwill).



Certainly, as far as the rollover relief conditions are concerned, Arthur has reinvested the sale proceeds from the UK business in new qualifying assets within the statutory period of three years following the disposal (section 152(3) Taxation of Chargeable Gains Act 1992), and the businesses are deemed carried on ‘successively’ (Statement of Practice 8/81). However, he was resident and ordinarily resident in the UK when the original car showroom was sold but non-resident when the Canadian car showroom was acquired, so what is the position regarding a rollover relief claim in these circumstances?



There are provisions to restrict the availability of rollover relief for non-residents, which are aimed at trades carried on through a branch or agency in the UK, broadly allowing rollover relief only if the replacement assets are chargeable assets of the trader, or if the claimant becomes resident or ordinarily resident in the UK (but not dual resident) when the new assets are acquired (section 159 Taxation of Chargeable Gains Act 1992). However, Arthur was UK resident (and ordinarily resident) when the original business was sold, and the original business was not a branch or agency.



A person who is resident or ordinarily resident in the UK can claim rollover relief on the disposal of qualifying assets against the acquisition of new qualifying assets, wherever they are situated. This is confirmed in the Revenue’s Capital Gains Manual (at paragraph 60253), which states that rollover relief should not be denied where a person has ceased to be resident or ordinarily resident in the UK when the new qualifying assets are acquired, if the other relief conditions are satisfied.



Enthused by this news, Arthur resolves to bring his tax affairs up to date with a vigour never before encountered by his long-suffering accountant. The fact that a rollover relief claim would increase the original capital gain for UK purposes (due to a loss of business asset taper relief) fails to dampen his spirits. After all, the Canadian Tax Authorities will not be concerned about the extent of any UK gains he has rolled over!



When Arthur gets his tax repayment he drinks a toast to his friends in the Winchester and to ‘Dear Old England’.