This is the first in a series of articles about asset rollovers, a tax relief available to businesses when one trade asset is exchanged for another. There are two types of rollover, one for capital assets such as land, the other for intangibles such as IP and goodwill (which we shall refer to collectively as IP).
Both types of relief are similar in their operation, but as we shall see, there are important differences. In this article we shall be concentrating on capital assets.
(This article can be downloaded in pdf format from Academia.edu.)
So what is rollover relief?
Rollover relief applies when an asset such as a factory or warehouse is sold and the proceeds used to buy another asset which is used in the trade. The tax that would normally have arisen on the sale of the first asset is deferred until the second asset is sold. And if the sale proceeds of the second asset are again reinvested, the tax can be deferred a second time. In theory, it is possible to defer the tax continuously in this way until the business is eventually sold.
This makes sense from a practical point of view. Since the cash that would have been used to pay the tax bill is tied up in the business, liability only arises when the funds are eventually released. In essence, the decision to “rollover” is a decision on allocating capital. The deferred tax is effectively an interest free loan from HMRC, to be repaid when the replacement assets have served their purpose.
What are the differences between capital assets and IP rollovers?
Before we look at each of the two types of rollover, it is worth noting the differences, some of which will become apparent by the end of this series:
- Capital asset rollovers are available only to trading ventures, but it doesn’t matter how the business is actually structured. For example, sole traders, partnerships, and corporates all benefit from the relief;
- On the other hand, IP rollovers are only available to corporates, but the business need not be a trade;
- The capital gains relief only applies to specific types of capital asset that are set out in a list. IP rollovers apply to all types of IP, provided that the relevant assets have been brought within the IP regime (there are some transitional rules on assets that were once capital but now are IP – we shall not be concerned with this sort of asset in this article);
- For IP rollovers, it is possible to rollover indirectly into the IP assets held by another company by acquiring the latter’s shares – this is not possible for capital assets;
- The effect of rolling over IP is to defer the tax by paying it in installments rather than in one go. But for capital gains, no tax is payable until the last asset in the chain has been sold (subject to the rules for depreciating assets).
We shall now look at the rules in more detail, starting with capital assets.
Capital asset rollovers – how does it work?
The legislation makes clear that the relief only applies to assets used in a trade1. This can be used in the person’s own trade or, where that person is an individual, his personal company. This is a company in which he holds at least 5% of the voting rights2.
It is possible to “mix and match” where a person has more than one trade. In other words, the gain on an asset used in one trade can be rolled over into an asset used in a different trade3. Furthermore in a group situation, one can roll over into a trading asset held by another group company4.
The way in which relief is claimed is as follows:
- The old asset is treated as having been disposed of on a “no gain no loss” basis5 – so no tax is due at the point of sale;
- The base cost of the new asset is reduced by the gain arising on the sale of the old asset – this is the “held over” gain6;
- The consequence is that the held over gain is brought into the tax net when the new asset is sold, or otherwise disposed of. But the hold over can be “carried over” if a further rollover claim is made;
- It is possible to apply only part of the relevant sale proceeds to acquiring new assets. In these circumstances, only part of the gain will be held over, the other part will be immediately chargeable7;
- If the new asset is a depreciating asset, the held over gain is brought into charge at the end of ten years, unless it has been disposed of before that date, (including the situation where it is no longer used in the trade)8. Otherwise one could hold on to the new asset until its value depreciates to such a negligible amount, that no one will buy it.
These provisions only apply to the person who is rolling over the gain9. So, taking the example of a trading company Tradeco claiming rollover relief:
- When Tradeco sells the old asset, it is only Tradeco as seller who adjusts the sale proceeds to the “no gain no loss” level. There is no corresponding adjustment to the buyer’s base cost;
- When Tradeco buys the new asset, it is only Tradeco as buyer who adjusts its base cost by the held over gain. The person selling the new asset to Tradeco calculates his CGT liability independently.
What are the time limits for making a rollover claim?
There are in fact two sets of time limits:
- Firstly, the sale proceeds need to be reinvested within a certain time period – the business has three years in which to acquire a new asset OR the sale proceeds can be “backdated” to apply to any relevant trading asset that was acquired within the previous year10 – “three years forward, one year back”;
- Having reinvested the proceeds, one must then make a claim for relief. The time limit is four years from the end of the relevant tax year. The relevant tax year is the year in which the new asset was acquired, unless it is a “backdated” claim, in which case time runs from the year in which the old asset was sold11
Example – selling an old factory for a new one
Let us assume we have a business that is selling off a factory and reinvesting the proceeds in another factory. We can suppose that the sale has been prompted by a plan to move the business’ operating HQ. Not a very imaginative example, but at least both types of asset are on the list!
Further assume the following:
- The property has a base cost of £5m and a sale price of £10m. This gives rise to a taxable gain of £5m (we shall ignore indexation and other reliefs);
- The new factory was bought for £12m – so all of the sale proceeds of the old factory have been used to buy the new one.
Now let’s see what happens when we make a claim for rollover relief:
- The old factory is deemed to have been sold for its base cost of £5m – this is the “no gain no loss” figure;
- The held over gain is £5m. This is the gain on the old factory being the sale proceeds of £10m less the base cost of £5m;
- The base cost of the new factory is adjusted downward to £7m, being the original £12m less the held over gain of £5m.
Several years later the new factory is sold for £20m. The capital gain is:
£20m – £7m = £13m
Sale proceeds less adjusted Base cost
Or we can rewrite this as:
(£20m – £12m) + £5m = £13m
[Sale proceeds less Base Cost] plus Deferred Gain
This last expression explains how the deferred gain comes into charge on the sale of the new factory.
Now suppose that instead of buying another factory, the sale proceeds are reinvested in a depreciating asset such as a piece of machinery. The deferred gain may take years and years to realise if the machinery is never sold – who’ll buy it when it’s only fit for the scrap heap? In this case, the £5m deferred gain is taxed at the end of ten years if the machinery hasn’t otherwise been disposed of.
What’s on the list?
Relief is only available for specific assets that are listed in the legislation. Both the old asset and the new must be on this list, but there is no requirement for the new asset to be of the same class as the old12.
Most of the items on the list are quite esoteric. The more common items are land and buildings, fixed plant and machinery and goodwill. Other items suggest a bias towards agricultural trades.
Items that are both capital and IP – which rollover do we use?
Some of these items are also intangibles – the most obvious being goodwill, but note also the milk and fish quotas. What are these items doing on this list, given the fact that the IP regime has its own rollover relief?
The answer lies in the fact that the list pre-dates the introduction of the IP regime for companies in 2002. Before that date, all items on the list were taxed as capital and the list applied to everybody seeking to do a rollover.
After 2002, the list is still valid for non-corporates as before – the intangibles on the list are still treated as capital items and can be subject to a rollover claim.
However for companies the position is modified:
- Firstly, one takes out all the intangibles from the list – what’s left is the new list that applies to companies intending to make a capital gains rollover;
- The intangibles that were taken out of this list are no longer the subject of a capital gains rollover, but are now eligible for an IP rollover.
The last point on IP rollovers is a subtle one which we shall explore more fully in later articles in this series.
- TCGA 1992 s 152(1). ↩
- TCGA 1992 s 157. ↩
- TCGA 1992 s 152(8). ↩
- TCGA 1992 s 175. ↩
- TCGA 1992 s 152(1)(a) ↩
- TCGA 1992 s 152(1)(b) ↩
- TCGA 1992 s 153. ↩
- TCGA 1992 s 154(2). ↩
- TCGA 1992 s 152(1) closing words. ↩
- TCGA 1992 s 152(3) ↩
- TMA 1970 s 43, FA 1998 Schedule 18, paragraph 55 and see HMRC Manual at CG60600. ↩
- TCGA 1992 ss 152(1), 155. ↩
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