What is Business Asset Rollover Relief?
Rollover relief is a valuable relief for business and it gives you a window to escape paying the capital tax on your new assets, provided you have bought the same by selling off your old ones and since it is applicable only where assets concerned fall within the capital gains tax net, it is basically a capital gains tax concept. This concept can be used by small businesses for deferring their tax on capital gain. In financial terms, business asset rollover relief allows you to defer capital gains tax in a situation where you are disposing of various qualifying assets from your business, provided the proceedings from the same is reinvested in buying the new assets for your business or trade. However, in order to defer from paying the capital gains tax, you have to start the reinvestment period at least twelve months before the disposal and it can extend till three years post the disposal. This concept derives its name from the fact that it gives you a window to “roll-over” or postpone the payment of capital gains tax, which you would be paying otherwise. However, you have to keep in mind that not every asset which you are disposing off, will give you the benefit of rollover relief and to qualify for the same, both the old and the new assets need to fall within the list of assets listed out in TCGA 1992, s 155 so you need to choose the same very carefully. The assets which give you that benefit include fixed plants and machinery and ships like printing press, aircraft and hovercraft, interests in land or buildings.
In other words, business asset rollover relief also means that you don’t have to bother for the Capital Gains Tax until you sell of the new assets which you have bought after disposing the old ones. You might also be able to claim provisional relief in case you have planned to use the proceeds from the disposal of old assets to buy new ones but haven’t done the same so far. And in case you are not planning to reinvest the entire proceedings from the old assets, you can claim for partial rollover relief and in that case, it is best to have some specialist tax advice. Similarly, in case you plan to buy depreciating assets from the proceeds of the old assets, the rules for the same are different than the complete and partial rollover relief because as per HMRC, there are certain assets, such as certain machineries, which should not be used for more than 60 years and thus automatically falls under depreciating assets.
The replacement assets which you have bought after disposing off your old ones must be brought into use for the purpose of trade as fast as possible, although HMRC does give you a buffer period to see if you require any alterations or modifications to the asset before it can be used for the trade purpose. However, you need to be careful here and ensure that the replacement assets are not being used for any other purpose other than the trade during this interval. In certain cases where the asset in picture is a land or a building which is used for both trading and non-trading purpose, for example, a house which has an office from where trade is being operated, the gain has to be assessed between the trading and non-trading element. And as mentioned above, only the elements which are used for the trading purpose are eligible for the rollover relief. HMRC keeps a very strict on the same and approves the rollover relief on the assets which are wholly being used for the trading period.
There are broadly six criteria which need to be met to obtain full roll-over relief, such as:
- If you have obtained consideration on the disposal of assets;
- You must be carrying out the trade as per the guidelines of ITA 2007 s 989 and s 158(1);
- The assets which are getting disposed off, must have been thoroughly utilized for the purpose of trade throughout the period of ownership;
- The new assets are attained by the full consideration which are brought into use in the trade;
- The assets must be used only for that particular trade; and
- Both the old and new assets must be within the classes listed in s 155.
Above criteria/conditions includes a company, an individual and trustees and also the individuals holding the assets which are being used by the personal companies. However, apart from the above mentioned conditions, rollover relief has been extended in s 158(1) and it includes the following:
- Activities which are involved in carrying on the functions of a public authority;
- The commercial occupation of woodlands;
- A profession, vocation, office or employment;
- In case of a non-profit organization, the activities which are wholly or mainly directed towards the protection as well as promotion of the trade or towards the professional interests of the members of the organization;
- The activities of certain unincorporated associations and other bodies chargeable to corporation tax.
The assets which are disposed of or the asset in which the interest is disposed of, must fall within one of the classes which is listed in s 155 and these classes are set out in Figure 1:
Head A It includes any building or part of a building, which are occupied as well as used. However, the usage of the whole building or part of that, whether permanent or semi-permanent structure, should be done only for the purpose of trade or if there is any land which is occupied as well as used solely for the trade purpose.
Head B Fixed plants or machinery. However, these fixed plants and machinery should not be a part of a building or of a permanent or semi-permanent in the nature of a building.
Ships, aircraft and hovercraft, wherein the hovercraft has the same meaning as in the Hovercraft Act 1968.
Satellites, space stations and spacecrafts including launch vehicles.
Milk quotas, which mean right to sell dairy product without paying any levy on that or to sell/deliver dairy products without paying any contribution towards milk levy and potato quotas, which allows you to produce potatoes without paying any extra contribution than the ordinary contribution to the Potato Marketing Board’s fund.
Ewe and suckler cow premium quotas which is rights in respect of any ewes or suckler cows to receive payments by subsidy entitlement.
Fish quota which is an allocation of share to catch fish stocks, which is derived from the Total Allowable Catches set in pursuance of Article 8(4) of Council Regulation (EEC) No 3760/92 and under annual Council Regulations made in accordance with that article or under any replacement Community Instruments.
Payment entitlements under the Single Payment Scheme that is the scheme of income support for the farmers in pursuance of Title III of Council Regulation (EC) No 1782/2003.
Head A Rights of member of a Llyod are under a syndicate within the meaning of Chapter III of Part II of the Finance Act 1993.
Head B Any asset which is a member of Llyod’s is treated as having acquired by virtue of s 82 of the Finance Act 1999.
All the old qualifying assets which have been classified for disposal should belong to one of the classes listed above and must only be used for the trade purpose throughout its period of ownership. In any other case, complete rollover will not be applicable.
How Can You Claim Business Asset Rollover Relief?
To claim Business Asset Rollover Relief, you have to fill up the Form HS290 and submit it at the Her Majesty’s Revenue and Customs (HMRC) along with your Self Assessment Tax Return. However in order to claim the rollover relief, you must submit the relevant documents within 4 years of the end of the tax year when you have bought the new asset or sold the new one, in case that has happened later.
For example, in case you have sold or disposed the old assets on 8th July 2012 and buy the new assets on 10th February 2014, you must claim the rollover relief by 5th April 2018.
The basic ideology behind the concept of business asset rollover relief is that it is given by treating the old asset as having been disposed of for zero gain or loss and thus the base cost of the replacement asset, i.e. the new asset is treated as reduced by the chargeable gain deferred. In case you have retained some of the proceedings that will be considered taxable, for example:
Jenny has sold her hairdressing business from which she has got the proceedings of worth £250,000. However, when she bought those freehold items, it cost her £150,000, which means she has earned chargeable gain worth £100,000. After selling off her hairdressing business, she started new business of floristry and the cost to set up the same is £225,000. So, in this case, the chargeable gain arising in that year for Jenny will be reduced to £25,000 and the chargeable gain deferred will be £75,000 (£100,000 - £25,000).
However, if you have your business in partnership, rollover relief will be available to the partners considering their individual shares. Similarly, if you are an individual where your assets are being used by personal company and its employees, you can claim rollover relief, if the old assets and the new ones, both belong to you and used by your personal company.
It is very important to keep the records for the assets on which the rollover relief has been claimed, especially when the chances/probability of selling of the new assets or the replacement assets for next few years is not very high.
Frequently Asked Question:
Q1: What is business asset rollover relief?
Ans1: Business asset rollover relief is a window to defer paying the Capital Gains Tax on the new assets, provided you have bought the same from the proceeds of the sale of your old qualifying assets.
Q2: How can you claim business asset rollover relief?
Ans2: Business asset rollover relief can be claimed by filling up the form HS290 and submitting the same to the HMRC with all relevant documents and Self-Assessment tax return.
Q3: Is business asset rollover relief is applicable to the partnership companies?
Ans3: Yes, you can claim for the business asset rollover relief even if you have the company in partnership. However, you will get relief only on the assets of your share.
Q4: Can I hold back some of the proceeds from the sale of old assets and still claim for the rollover relief?
Ans4: Yes you can do so however, in this case, you will not get full rollover relief, but rather get a provisional rollover relief.