Reshma Johar explores a relatively less well-known form of capital gains tax relief.
A capital gains tax (CGT) rollover relief is potentially available when dealing with a ‘compulsory purchase order’ (CPO) of land. A CPO can only be made by central government, including public and local authorities.
The disposal falls within the CGT provisions if an authority is either exercising or holding compulsory powers.
Rollover relief
This form of CGT rollover relief will be available if the taxpayer reinvests either part of or the entire proceeds in acquiring the replacement new land. The conditions for the relief are broadly:
- The owner of the land has not advertised the land for sale. There is no timeframe for this, but in practice HMRC does not normally look back more than three years.
-
The compensation is applied in the purchase of new land that is not a dwelling house or part of a dwelling house, which within six years would qualify for principal private residence (PPR) relief. Provided that the owner does not live in the replacement property, this condition will be met.
The replacement new land must be acquired (or an unconditional contract entered into) in the period either 12 months before the disposal of the land or within three years after the disposal of the land. HMRC does have power to extend that period, but normally HMRC will require the taxpayer to wait for the purchase to take place and then explain to them why it could not happen within the time limit for reinvestment.
For purchases made within 12 months before the disposal of land, relief may be denied if the purchase of the new land took place at a time when the taxpayer had no knowledge of the likely compulsory purchase. Any decision will be determined based on the facts.
Different rules for rollover will apply if the replacement new land is a ‘wasting asset’ (a lease of less than 60 years). Broadly, the gain comes back into charge on the earlier of either ten years or when the replacement new land is disposed of.
How the relief works
The chargeable gain arising from the disposal of the old land is reduced by the amount of rolled over gain (which could wipe out either part of, or the entire gain).
The base cost of the replacement new land will be reduced by the rolled over gain.
Compensation associated with a CPO
A CPO can also include a compensation payment. The payment can be built up of both capital and income elements. Capital amounts will form part of the CGT calculation, whereas income amounts will be subject to income tax.
HMRC’s Capital Gains manual at CG72101 provides examples of both capital and income elements.
Reporting requirements
A CGT property disposal return will not be required if there is no liability to CGT, which may be because rollover relief has reduced a gain to nil or below the annual exemption.
If, for example, relief is claimed for only part of the gain and a CGT liability arises, the disposal would need to be reported and tax should be settled within 30 days of the disposal.
A claim for rollover relief should also be made on a self-assessment tax return.
Deadline for making a claim for rollover relief
A claim for rollover relief must be made within four years after the end of the tax year in which the later of either the disposal of old land or the reinvestment in new land takes place.
Practical tip
If the acquired land under a CPO represents only part of the holding of land then, subject to certain conditions, the taxpayer can make a claim under small part disposal. See HMRC’s Capital Gains manual at CG72200.
