Rollover relief is a relief that enables a charge to capital gains tax (for a company, to corporation tax) to be deferred when the proceeds from the disposal of an asset are reinvested in a new asset. Any gain arising from the disposal of the new asset will be correspondingly increased (unless the gain is, once more, rolled over).
Rollover relief is only available for the following types of asset:
- building for the purposes of trade
- any land used only for the purposes of trade
- fixed machinery and plant
- ships, aircraft and hovercraft
- satellites, space stations and space vehicles
- milk quotas and potato quotas
- ewe and suckler cow premium quotas
- fish quotas
- oil licences
Note, however, that regarding plant and machinery, rollover relief is only available if it is fixed and so, for example, motor vans and fork lift trucks do not qualify.
To get the relief you must use the old and new assets in the same business. However, if you carry on several trades, they are treated as one for this purpose. Relief is still available if you cease one trade and start another. Also, rollover relief applies regarding purchases and sales by you of personally owned assets used in your 'family company'.
Capital gains tax
Rollover relief is applicable to companies. Also, a special extension of the rules covers gilts obtained by companies in exchange for group companies in the aircraft and shipping industries on compulsory acquisition through nationalisation. An election is required within four years of the exchange and then the normal new compensation stock rules do not apply.
Dual-resident companies obtain no rollover relief where they replace a UK business asset with one overseas. Also rollover relief is denied where the replacement asset is outside the UK tax charge and is acquired by a dual resident group member.
To fit in with the new self-assessment rules, provisional rollover relief claims will be allowed, including on compulsory purchase. You will need to declare in your tax return that you intend to re-invest the proceeds in qualifying assets and will lose your relief unless you reinvest within three years of the disposal
Extending capital gains tax rollover relief on marriage breakdown
CGT marriage breakdown rollover relief to in specie transfers of personal superannuation interests from a small superannuation fund to another complying superannuation fund under specific conditions. This enables separating spouses to achieve a 'clean break' from each other in terms of their superannuation arrangements.
The law provides CGT rollover relief on marriage breakdown for a transfer of any CGT asset reflecting the personal interest of either spouse (but not both) in a small superannuation fund to another complying superannuation fund if that transfer satisfies specific conditions. The amendments also allow:
- the existing CGT marriage breakdown rollover relief between small superannuation funds to extend to transfers from a small superannuation fund to another complying superannuation fund
- the CGT marriage breakdown rollover relief for transfers of non-superannuation assets to ensure that they apply to transfers pursuant to written agreements made under Western Australian, Tasmanian, Queensland or Northern Territory laws relating to de facto marriage breakdown
Examples of Rollover relief
- Rollover relief is commonly used when a business is moving to a different location, and needs to purchase new equipment and machinery, or when a business is expanding and needs to purchase new assets. In such cases, the proceeds from the sale of the old assets can be used to purchase the new assets, and the gain on the sale of the old assets can be deferred.
- Another example would be when a company is selling its shares. If the company reinvested the proceeds from the sale into new shares, it may be eligible for rollover relief, which would allow it to defer the payment of capital gains tax on the sale of the old shares.
- Another example would be a company selling a business, such as a shop. If the proceeds from the sale were reinvested into another business, the company would be able to defer paying capital gains tax on the sale of the old business.
- In the case of individuals, rollover relief may be used when a property is sold and the proceeds are reinvested into another property, allowing the individual to defer paying capital gains tax on the sale of the old property.
Advantages of Rollover relief
Rollover relief provides a number of advantages to those looking to dispose of an asset and reinvest the proceeds. These advantages include:
- Flexibility - Rollover relief allows the taxpayer to defer the payment of tax until a later time when they are ready to do so. This gives the taxpayer more time to determine the best course of action and manage their finances.
- Cost Savings - By deferring the payment of tax, the taxpayer can save money in the short-term by avoiding the payment of taxes on the gain. This can help the taxpayer to invest more money in the new asset or to use the savings elsewhere.
- Avoid Double Taxation - Rollover relief also helps to prevent double taxation, as the taxpayer is able to defer the payment of taxes on the gain until the proceeds from the new asset are realized. This can help to ensure that the taxpayer does not pay more in taxes than is necessary.
Limitations of Rollover relief
Rollover relief is a tax relief which can be used to defer the payment of capital gains tax and corporation tax when proceeds from the disposal of an asset are reinvested in a new asset. However, there are some limitations to this relief, including the following:
- Firstly, the reinvestment must take place within three years of the disposal of the original asset.
- Secondly, the proceeds must be reinvested in a similar type of asset.
- Thirdly, the relief can only be used once per asset and cannot be applied to multiple disposals.
- Lastly, the relief cannot be used to defer the payment of Inheritance Tax.
Rollover relief can also be used in other areas of taxation. Some examples of other approaches related to Rollover relief are:
- Loss relief - Loss relief allows for a taxpayer to offset losses against gains of the same or different tax year. This is useful for taxpayers who have made a loss on the sale of a capital asset and wish to offset it against any gains arising from other sales.
- Group relief - Group relief allows a company to transfer profits and losses between companies within the same group. The companies must be resident in the same country and form part of the same company group.
- Deferral relief - Deferral relief allows the taxpayer to defer payment of tax on gains made on the sale of a capital asset. This can be done by investing the proceeds into a new asset, with the tax liability being deferred until the new asset is sold.
In summary, rollover relief is one approach to deferring or avoiding capital gains tax, but there are also other approaches such as loss relief, group relief and deferral relief. All of these approaches can be used to reduce or defer tax payments.
- Law J., (2018), A Dictionary of Law, Oxford University Press, New York.
- Sinclair W., Lipkin E., (2010), St James's Place Tax Guide, Springer, London.
- The Taxpayers Guide (2015), John Wiley & Sons, Milton.
Author: Ewa Szczyrbak