Chris Williams explains how to replace business assets without an immediate capital gains tax liability.
Business asset replacement, or ‘roll-over relief’ as it is usually known, is a very valuable relief which can extend very widely, but which also carries a few traps for the unwary.
How does it work?
Roll-over relief (in TCGA 1992, Pt V, Ch 1) applies by matching the proceeds of sale of the old asset with the price paid for a new asset. Care is needed in this area because relief is only available if the amount reinvested is greater than the cost of the old asset and you only get full relief if you reinvest all the proceeds. The amount paid for the new asset is deducted from the sale proceeds of the old one and also reduces the base cost of the new asset, meaning there may be a bigger gain when the replacement asset is sold.
If the replacement asset is machinery or plant the roll-over relief only lasts for ten years, after which the gain held over becomes chargeable. However this can be a useful temporary measure because the gain is not only held over, but if further investment is made in permanent assets (not plant or machinery), full roll-over is available.
The relief applies to all trades, whether carried on by an individual, partnership or company, so long as the old asset was used in a trade and the new one is brought into business use immediately on acquisition. The relief applies to improvements and enhancements, so if a building is split and the half to be retained is altered and improved, then the other half is sold, it is possible for the gain on the later sale to be offset against the cost of improvements to the retained half.
Points to note
- There’s no need for the new asset to be a direct replacement for the old, to do the same job or even to be used in the same business. So a car dealer who sells his forecourt for property development can invest the proceeds in an off-street storage facility for cars that he will sell online. In fact, the two trades don’t have to be the same either; there just have to be trades. So a farmer can stop farming, sell his fields and build new holiday cabins for a furnished holiday letting business and still get the relief.
- Roll-over relief isn’t available if buyer and seller are different persons, so if a sole trader sells his business and sets up a company, assets purchased by the company or for its use won’t qualify him for the relief. Employees, including directors, who own assets used in their employer’s business can claim roll-over relief if the replacement assets are also used in the same business.
- There is no need to demonstrate that the actual cash proceeds received were reinvested and the time limits available are relatively generous. There is a four year ’window’ which allows the investment in new assets to be matched with disposals in the three preceding years and the following year. HMRC may also allow relief for replacements made more than three years after the disposal if the buyer has genuinely been trying to find a replacement and the reasons for delay are beyond his control, such as delays in finding a suitable property or contractual delays.
Practical Tip:
You can choose which assets to allocate the relief to. So if you sell two assets, for £300,000, say goodwill worth £150,000 (at a gain of £150,000) and a building for £150,000 (at a gain of £50,000) and buy one replacement building for £200,000, you can choose to treat that as replacing the goodwill first and so shield the larger gain. The remaining £50,000 expenditure goes unmatched because it doesn’t exceed the building’s base cost.
