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NEWS

Rollover Relief (RR)

Rollover Relief (RR) is available to companies and traders when they sell a business asset and replace it with another. RR is a form of deferral relief, which means it defers the capital gain to a later period, by reducing the base cost of the new asset purchased. This results in a potentially larger gain in the future when the new asset is eventually sold.


If the proceeds from the sale of the original asset are not fully reinvested any retained cash will be subject to tax on the portion of the gain corresponding to the cash retained.


Both the old and new assets must be used in the trade. Qualifying assets for RR include land and buildings, goodwill (for individuals only), and fixed plant and machinery (P&M). It’s important to note that shares do not qualify for RR.


Example:


A trader sells a business asset for £200,000 and makes a capital gain of £80,000. They use £180,000 of the proceeds to purchase a replacement asset.


Calculation:

  • Proceeds: £200,000

  • Original Cost: £120,000

  • Gain: £80,000

  • Rollover Relief (RR): £60,000

  • Chargeable Now (cash retained): £20,000 (the difference between the proceeds and the purchase price of the new asset)


As shown above, the retained cash (£20,000) is chargeable. The base cost of the new asset is reduced by the RR, which in this case is £60,000. Therefore, the new asset’s base cost is £120,000 (£180,000 minus £60,000).


RR and Depreciating Assets


A depreciating asset is one with a useful life of no more than 60 years. Examples include leasehold buildings with less than 60 years remaining on the lease, and fixed plant and machinery.


When a trader purchases a depreciating asset, RR is not deducted from the base cost of the new asset. Instead, the gain on the old asset is "frozen" and only crystallizes on the earliest of the following events:

  • Sale of the depreciating asset

  • The depreciating asset is no longer used in the trade

  • 10 years from the acquisition of the depreciating asset


This presents a planning opportunity for the trade, as the gain on the sale of the old asset is deferred for up to 10 years. Full RR relief can be claimed when the trader purchases a non-depreciating asset.


Other Notable Points


  • Business and Non-Business Use: If the asset has both business and non-business uses, it will be treated as two separate assets, and only the business portion will qualify for RR. For example, if a building is sold where the ground floor was used for business and the first floor was rented out, only the business portion qualifies for RR.

  • Timeframe for Acquiring a New Asset: The new asset must be acquired within 12 months before or 36 months after the sale of the old asset.

  • Claiming RR: A claim for RR must be made within four years of the end of the later of the tax years in which:

    • The gain arises, or

    • The new asset is acquired.


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Authored by: London Team

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