Enter Your E-mail

Andrew Goodall, CTA provides an overview on an important capital gains tax relief for traders.

Introduction

The effect of roll-over relief is to defer a chargeable gain where the proceeds of disposal of business assets (the ‘old assets’) are used to invest in new business assets. The old and the new assets must be used in the business. The relief must be claimed. Spouses and civil partners are separate persons for roll-over relief.
 
Roll-over relief is applied by deducting the gain from the acquisition cost of the new assets. The claim does not affect the tax position of the other parties to the transactions. The gain deferred – or rolled over – in this way may give rise to a CGT liability on a disposal of the replacement assets, but roll-over relief may be claimed on that disposal if the conditions are met. A chargeable gain may arise on the disposal of the old assets if the relief claimed on that disposal is restricted (TCGA 1992, s 152).

A rolled over gain escapes CGT in the event of the taxpayer’s death. In some cases, however, the gain on the old asset is ‘postponed’ instead of being ‘rolled over’ or deducted from the cost of the new asset.

There are separate time limits for reinvestment of the consideration for the disposal and claims. Both the assets disposed of and the replacement assets must fall within one of the classes of asset listed in the legislation, but the new assets need not fall within the same class as the old assets.

Where a provision of TCGA 1992 fixes the consideration deemed to be given for the acquisition or disposal – for example, transactions between connected persons are treated as undertaken for a consideration equal to market value – the deemed consideration is treated as the actual consideration for the purpose of roll-over relief (TCGA 1992, s 152(10)).

Conditions

General

Roll-over relief must be claimed. It is available if the taxpayer:

• carries on a trade;
  
• disposes of assets (or his interest in assets) used only for the purposes of that trade throughout the period of ownership (the ‘old assets’);
  
• applies the consideration obtained for the disposal in acquiring other assets (or an interest in other assets) (the ‘old assets’); and
  
• uses the new assets solely for the purposes of the trade.

The effect of the relief is that:

(a) the consideration for the disposal of the old assets is reduced to the amount that would give rise to neither a gain nor a loss accruing on the disposal; and

(b) the amount (or value) of the consideration that the taxpayer gives for the acquisition of the new assets is reduced by the amount of the reduction in (a).

The CGT treatment of the other parties to the transactions is not affected. Both the old assets and new assets must be within the classes of assets listed in TCGA 1992, s 155, although they do not need to be in the same class as each other (TCGA 1992, s 152(1)).

‘Trade’ has the same meaning for roll-over relief as it has in the Income Tax Acts, and ICTA 1988, s 832 provides that ‘trade’ includes every trade, manufacture, adventure or concern in the nature of trade. However, relief is extended to other activities (TCGA 1992, s 158(2)).

Tracing the disposal proceeds

It is not normally necessary to trace the actual proceeds and match them to the funds invested in the new assets. The new assets can, for example, be funded by borrowings. HMRC recognise that seeking to trace the disposal proceeds through to the acquisition of the new assets would result in relief being denied in most cases. Where the new asset is acquired before the old one is disposed of, the disposal consideration cannot be applied in this way. Where the disposal comes first, the consideration is likely to be put to some other purpose. Paying the proceeds into a bank account, for example, gives rise to the acquisition of a debt.
There is an exception, however, where the taxpayer is seeking an extension to the reinvestment time limits. In this case he may need to be able to demonstrate a continuing intention to reinvest the disposal consideration within the extended time limit (CG 60770, CG 60771).

Allocating the consideration

Where there is more than one acquisition HMRC will accept the taxpayer’s allocation of the gain to be rolled over against the new assets. HMRC consider that there must be a specific allocation before the claim can be allowed (CG 60775, CG 60776).

Residence

HMRC accept that relief may be claimed even if the replacement assets are outside the UK, except in the case of furnished holiday accommodation which must be in the UK. Relief will not be denied where all the conditions are met but, at the time the new assets are acquired, the taxpayer has ceased to be resident or ordinarily resident in the UK (CG 60253).

However, there is a potential charge for ‘temporary non-residents’ where a gain has been the subject of a roll-over relief claim (either under the normal rules or under the special rules for new assets that are depreciating assets) and there is a disposal of the new asset during a period of temporary non-residence. The gain may be treated as accruing to the temporary non-resident on his return to the UK (TCGA 1992, s 10A(3), (4) (CG 26230)).

Non-residents with UK branch, etc

However, if a gain arising on the old assets would be chargeable under TCGA 1992, s 10(1) (non-resident with a UK branch or agency) or TCGA 1992, s 10B (non-resident company with a UK permanent establishment) then roll-over relief is not available unless the new assets, immediately after they are acquired, would also fall within s 10(1) or s 10B on a disposal (TCGA 1992, s 159(1)).

This condition does not apply if:

(a) the relevant acquisition takes place after the disposal and the taxpayer is resident or ordinarily resident in the UK immediately after the acquisition; or

(b) immediately after the time the new assets are acquired:

• the taxpayer is a ‘dual resident’, ie a person who is both resident or ordinarily resident in the UK and regarded for double tax relief purposes as resident elsewhere, and
• the assets are ‘prescribed assets’, ie assets specified in a double tax agreement with the effect that the dual resident is regarded as not liable in the UK to tax on gains accruing to him on a disposal (TCGA 1992, s 159(2), (3), (5)).

Other conditions

There are conditions relating to qualifying activities; assets; and the time when the new assets must be taken into use.

Qualifying activities

Roll-over relief is available where a person carrying on a trade reinvests the proceeds of disposal of assets used for the purposes of the trade in the acquisition of new assets to be used for the purposes of the same trade. See below regarding qualifying activities other than trades.

No relief is due if the new assets are acquired wholly or partly for the purpose of realising a gain from their disposal (TCGA 1992, s 152(5)).

HMRC accept that this rule is not intended to deny relief merely because it is expected the asset will be sold at a profit at some stage. HMRC guidance says:

‘The point turns on the claimant’s intentions at the time of acquisition. If the intention is to keep the asset and to use it for trade purposes, relief may be allowed. If the intention is to dispose of the asset and its trade use is merely a temporary convenience, relief should be denied. An example is where a farmer acquires more land than is required (perhaps because the vendor will not sell less than an entire estate) and intends to dispose of the surplus, often to finance the cost of the part retained’ (CG 60406).

A person who carries on two or more trades, either at the same time or in succession, is regarded as carrying on a single trade (TCGA 1992, s 152(8)).

HMRC are prepared to regard trades as being carried on ‘successively’ if the interval does not exceed three years, but the time limits for reinvestment must still be met (see 14.35). Relief will be available, but may be restricted by reference to non-trade use, if the old assets are disposed of during the interval. New assets acquired during the interval may qualify as replacement assets provided they are not used or leased for any purpose before the new trade begins, and are taken into use for the purpose of the trade on commencement (HMRC statement of practice SP 8/81; CG 60501).

Activities other than trades

The main roll-over relief provisions in TCGA 1992, ss 152–157 refer only to trades. The relief is extended to replacement of assets used for the purpose of a profession, vocation, office or employment (TCGA 1992, s 158).

Where relief is claimed in respect of assets used for the purposes of the claimant’s office or employment, it will not be denied because the asset is also used by the employer for the purposes of the employer’s trade. HMRC regard the ‘sole use’ condition as satisfied unless the asset is used for some purpose ‘alien to’ the office or employment (CG 60540–60544).

So far as land and buildings are concerned, the employee must occupy the asset as owner and not merely as a licensee of the employer. HMRC guidance says:

‘If land or buildings are owned by an employee etc, but made available to the employer for general use in his trade, the employee etc may nonetheless satisfy the occupation test of TCGA 1992, s 155 provided the employer does not make any payment (or give other consideration) for his use of the property nor otherwise occupy it under a lease or tenancy. The qualifying use of assets by an employee etc for the purposes of TCGA 1992, ss 152 and 153 will include any use or occupation of those assets by him, in the course of performing the duties of his employment or office, as directed by the employer’ (HMRC statement of practice SP 5/86).

A taxpayer who meets the conditions of TCGA 1992, s 152 by reference to his office or employment and at the same time meets the conditions of TCGA 1992, s 157 may choose under which heading he wishes to claim relief (CG 60505).

The taxpayer may carry on two different activities, for example a trade and an employment, at the same time or successively. The fact that the two activities are different does not prevent relief applying so long as the various conditions including, where appropriate, the terms of HMRC statement of practice SP 8/81 (see above) are met.

‘Trade’, ‘profession’, ‘vocation’, ‘office’ and ‘employment’ have the same meaning for roll-over relief as they have in the Income Tax Acts, so that farming, and the commercial letting of furnished holiday accommodation in the UK that falls within TCGA 1992, s 241, may qualify (TCGA 1992, ss 158(2), 241(3)).

The relief also applies to the replacement of assets used for the purposes of the following activities, as it applies in relation to trades:

• the discharge of the functions of a public authority;
  
• the occupation of woodlands managed by the occupier on a commercial basis;
  
• the activities of a non-profit making body that are wholly or mainly directed to the protection or promotion of its members’ trade or professional interests; and
  
• the activities of an unincorporated association or other body chargeable to corporation tax, but not established for profit, whose activities are wholly or mainly carried on otherwise than for profit, for example, trade unions, sports clubs and local constituency associations of political parties. The body must use the assets for the purpose of its activities, and in the case of land and buildings within Head A of Class 1 (see 14.15) the body must both occupy and use them for those activities (rather than letting them). By concession (ESC D15), HMRC regard relief as being available where the assets are held by a company in which at least 90% of the shares are held by or on behalf of such a body or its members (TCGA 1992, s 158(1)).

Trade carried on by the taxpayer’s personal company

The relief is extended to the situation where the owner of the asset is an individual but the trade is carried on by a company. The individual is deemed to be carrying on the trade(s), for the purpose of the conditions in TCGA 1992, ss 152–156, where:

(a) the person disposing of the old assets (or an interest in them) and acquiring the new assets (or an interest in them) is an individual; and

(b) the trade or trades in question are carried on by a company which is his ‘personal company’ (TCGA 1992, s 157).

The condition in (b) must be met both at the time of the disposal and at the time of the acquisition referred to in (a). A company is the taxpayer’s ‘personal company’ if he can exercise at least 5% of the voting rights.

HMRC consider that both the old and new assets must be used for qualifying activities of the same personal company, on the basis that TCGA 1992, s 157 directs that TCGA 1992, s 52 should be read as if it said:

‘If the consideration which an individual obtains for the disposal of . . . the old assets used and used only for the purposes of the trade carried on by his . . . personal company . . . is applied by him in acquiring . . . the new assets which on the acquisition are taken into use, and used only, for the purposes of the trade carried on by that . . . personal company. . . ‘ (CG 60504).

Trade carried on by a partnership

Roll-over relief extends to a business partner’s interest in the chargeable assets of a partnership (TCGA 1992, s 157).

Where the partnership disposes of an asset qualifying for relief, or there is a reduction in the partner’s share of the partnership’s capital assets following a change in the asset-sharing ratio, the partner may obtain roll-over relief by means of either:

• the partnership’s acquisition of qualifying assets in which the partner has an interest; or
  
• the partner’s acquisition in qualifying assets, either used by the partnership (see below) or unrelated to the partnership’s business.
  

Relief is also available for assets used in the partnership’s trade but owned by an individual partner rather than the partnership. This applies even if the partner receives rent for the use of the asset (HMRC statement of practice D11).

Where land used for the purposes of a partnership’s trade is ‘partitioned’ by the partners on a dissolution of the partnership, strictly speaking no roll-over relief is due because an exchange of interests in a single asset does not involve the acquisition of ‘other assets’. By concession, HMRC will treat the land acquired as a new asset providing that:

• the partnership is dissolved immediately after the exchange; and
  
• the former partners retain an interest only in land used by them in a new trading enterprise and do not retain any interest in that part of the land no longer used by them for trade purposes (HMRC concession ESC D23).

Spouse and civil partners

In Tod v Mudd [1986] 60 TC 237, Ch D, it was established that spouses are separate persons for the purpose of roll-over relief so that the conditions for relief apply separately to each person’s interest in an asset used by a husband and wife partnership. Mr Mudd and his wife acquired as tenants in common a new asset in the form of a property. They used it as to 75% as a guest house, and the remaining 25% as their residence.

A trust deed recorded that the property would be held by them upon trust as to 75% for Mr Mudd and as to 25% for his wife. Mr Mudd claimed that 75% of the cost of acquisition of the premises qualified for roll-over relief in relation to his earlier disposal of his accountancy practice.

It was held that he was entitled to relief only in respect of the proportion (75%) of his undivided share (75%) of the premises. The same principle would extend, with effect from 5 December 2005, to civil partners who are also partners in business.

Limited liability partnerships

A limited liability partnership (LLP) is treated for CGT purposes in the same way as any other partnership while it is trading, despite being a body corporate. The LLP itself is regarded as transparent for CGT purposes, with each member being charged to tax on his share of any gains accruing to the LLP (TCGA 1992, s 59A).

However, when an LLP ceases to trade, it loses its tax ‘transparency’ and reverts to its corporate status (unless there is merely a temporary break in trading where, for example, the LLP has ceased to carry on one trade and disposed of its assets in order to raise funds to start another trade) (TCGA 1992, s 59A(2), (3)).

Any gains rolled over or postponed by a member of the LLP might escape as a result of the reversion to corporate status but for a special rule that deems the member to have realised a chargeable gain immediately before the LLP ceased to be transparent. This rule operates as set out below:

• Where, immediately before ‘the time of cessation of trade’ (see below), an LLP member holds an asset (or an interest in an asset) that he acquired for a consideration treated as reduced by virtue of a roll-over relief claim under s 152 or s 153, he is treated as if a chargeable gain equal to the amount of the reduction accrued to him immediately before that time.
  
• Where a gain postponed by virtue of a s 154(2) claim (see 14.31) made by an LLP member has not accrued before the time of cessation of trade, he is treated as if that gain accrued immediately before that time.
  
• ‘The time of cessation of trade’, is the time when s 59A(1) ceases to apply to the LLP, ie when it loses its tax transparency (TCGA 1992, s 156A).

Groups of companies

The trades carried on by members of a group of companies (as defined) are treated as a single trade for roll-over relief purposes. The rules specific to companies are examined in Chapter 9.

Assets

Both the old assets and the new assets must fall within one of the nine classes listed in TCGA 1992, s 155, but they do not have to fall within the same class as each other. These classes are summarised in table 14.1, and explained further in the following paragraphs.

Land and buildings

Head A of Class 1 is excluded where the trade is a trade of dealing in or developing land. However, Head A can apply where a profit on the sale of any land held for the purposes of the trade would not form part of the trading profits.

Head A does not apply where the trade is a trade of providing services for the occupier of land in which the trader has an estate or interest. A lessor of tied premises is treated as both occupying and using the premises for the purposes of the trade (TCGA 1992, s 156).

Fixed plant or machinery

It was established in Williams v Evans [1982] 59 TC 509, Ch D that in Head B of Class 1, the word ‘fixed’ applies to both plant and machinery. Motor vehicles, for example, would normally be excluded. HMRC apply four tests in determining whether an item of plant or plant or machinery is fixed:

(a) In the context of the particular trade, is the object plant or machinery as opposed to, for example, trading stock or part of a building?

(b) Does the taxpayer intend to hold the object in a particular location indefinitely?

(c) Is the location of the object in a particular site essential to its function in the trade?

(d) What means of permanent fixing are available, or necessary, without rendering the object part of the land or buildings, and without damaging or destroying the object? (CG 60970–60975).

Ships, aircraft, etc

HMRC accept that ‘ships’ in Class 3 includes fishing boats, motorised cruisers and yachts, and that ‘aircraft’ includes aeroplanes, helicopters, airships and hot air balloons (CG 61060).

Goodwill

With regard to goodwill, in Balloon Promotions Ltd v HMRC [2006] SPC 524 a franchisee operating a restaurant business sold the business to the franchisor and allocated part of the consideration to goodwill not inherent in the property. HMRC contended that there was no saleable goodwill and that the consideration represented compensation for early termination of the franchise agreements. The Special Commissioner held that goodwill was attached to the franchisee’s business, and that the consideration obtained for it qualified for roll-over relief. He also questioned the approach taken by HMRC in their capital gains tax manual, which categorises goodwill into three types.

Companies: intangible assets

Classes 4 to 7 in table 14.1 do not apply to companies, except where transitional rules apply for acquisitions before 1 April 2002, because the assets listed are now included in the corporation tax regime for intangible assets introduced in the Finance Act 2002.

Acquisition of ‘other assets’

The legislation refers to investment in ‘other assets’ but by concession, where a person disposes of a trade (or a trade asset) and repurchases the same asset later for purely commercial reasons, HMRC will regard that asset as a ‘new asset’ unless the disposal and reacquisition ‘appears to have been carried out for avoidance purposes’. This concession may be applied to partnership changes resulting in reacquisition of fractional shares in partnership assets (HMRC concession ESC D16).

However, it was held in Watton v Tippett [1997] 69 TC 491, CA that a gain arising on a part disposal of land and buildings cannot be rolled over against the acquisition of the part retained after the part disposal.

By concession, capital expenditure to enhance the value of other assets is treated as incurred in acquiring other assets provided that:

• the other assets are used only for the purposes of the trade; or
  
• on completion of the work, the assets are immediately taken into use and used only for the purposes of the trade (HMRC concession ESC D22).

Another concession applies where a person carrying on a trade uses the proceeds from the disposal of an old asset to acquire a further interest in another asset that is already in use for the purposes of the trade. That further interest is treated as a new asset taken into use for the purposes of the trade (HMRC concession ESC D25).

A right to unascertainable future consideration may be received as part of the consideration for disposal of the old asset. Roll-over relief is not available on a later disposal of that right because the right is not among the classes of asset listed (CG 14970, CG 60430).

New assets to be used ‘on acquisition’

A new asset must be taken into use for the purpose of the business ‘on the acquisition’ of the asset if it is to form part of a roll-over relief claim (TCGA 1992, s 152(1)).

HMRC interpret this as meaning that the asset must be taken into use at the time any contracts are completed – by conveyance or delivery – and possession has been obtained. See also 14.24 regarding the period of ownership, in relation to the restriction of relief where there is non-business use.

However, allowance is made for necessary alterations, adaptations or other steps required before the asset can be taken into use. HMRC guidance indicates that relief should not be denied solely on the grounds that the asset was not brought into use as soon as it was acquired, provided that it was brought into use as soon as practicable after the acquisition and without unnecessary delay. HMRC would expect the interval to be short in most cases (CG 60830–60832).

In Milton v Chivers [1996] STC (SCD) 36 the Special Commissioner held that the phrase ‘on the acquisition’ did not mean ‘immediately on the acquisition’ but it did mean that the taking into use and the acquisition must be ‘reasonably proximate’ to one another.

By concession, HMRC will allow relief where a new asset is not taken into use for the purposes of a trade immediately on acquisition but:

• the owner proposes to incur capital expenditure on enhancing its value;
  
• any work arising from such expenditure begins as soon as possible after acquisition and is completed within a reasonable time;
  
• the asset is taken into use – and in the case of land and buildings, occupied – for the purpose of the trade (and for no other purpose) on completion of the work; and
  
• the asset is neither let nor used for any non-trading purpose in the period between acquisition and the time it is taken into use for the purpose of the trade (HMRC concession ESC D24).

HMRC regard this approach as an interpretation of TCGA 1992, s 152(1) that gained judicial approval in Steibelt (Inspector of Taxes) v Paling [1999] 71 TC 376, Ch D, rather than as a concession, but have indicated that they will continue to draw on that interpretation where appropriate (CG 60850).

Assets used only partly for business purposes

It is necessary, in the following situations, to calculate the acquisition or disposal consideration relating to a deemed ‘separate asset’ qualifying for roll-over relief:

• Where, during the period of ownership (or any substantial part of it), part of a building or structure is used for the purposes of a trade and part is not so used, then the part used for trade purposes – together with any land occupied for purposes ancillary to it – is treated as a separate asset. HMRC regard this rule, together with the reference in Head A of Class 1 of the list of qualifying assets to ‘any building or part of a building’, as applying to the new assets as well as the old assets. The rule applies only to buildings, so that other assets must be used for the purpose of the business and no other purpose (TCGA 1992, s 152(6); CG 60520).
• If the old asset was not used for the purposes of the trade throughout the period of ownership, then a part of the asset representing its use for the purposes of the trade is treated as a separate asset used wholly for the purposes of the trade. This part is to be calculated having regard to the time and extent to which it was, and was not, used for the purposes of the trade (TCGA 1992, s 152(7)).

Any period of ownership before 31 March 1982 is ignored for these purposes. Any apportionment of consideration for the above purposes is to be made in a just and reasonable manner and where appropriate HMRC will seek to ensure that all parties to a transaction are bound by the same apportionment of the total consideration (TCGA 1992, s 152(11); CG 60303).

Example

Khaled bought a freehold property on 1 September 2003 and let it to a tenant for one year before occupying and using it for the purpose of his trade on 1 September 2004. He used the whole of the property for the purpose of the trade until he sold it on 1 September 2006 for £150,000.

A chargeable gain of £90,000 accrued. Two-thirds of the gain arising, ie £60,000, may be deferred if Khaled reinvests the proceeds of £150,000 in qualifying assets.

The period of ownership

HMRC consider that the period of ownership of an asset for roll-over relief purposes is the period of beneficial ownership and possession. This period may not be the same as the period from the time of the acquisition and the time of disposal, as defined for the general purposes of CGT. For example, TCGA 1992, s 28 provides that where an asset is acquired under an unconditional contract the time at which the acquisition is made is the time the contract is made (and not, if different, the time at which the asset is conveyed or transferred). However, beneficial ownership may not be obtained until completion and the period of ownership for roll-over relief begins when beneficial ownership is obtained, but HMRC have indicated that they will not pursue ‘trivial adjustments’ (CG 60520–60528).

Operation of the relief

Full relief

Roll-over relief is given without restriction if an amount equal to the net consideration for the disposal (after deducting allowable costs of disposal) of the old asset is reinvested in a new, qualifying asset. For this purpose the net consideration for the old asset is compared with the cost of acquisition, including allowable incidental costs, of the replacement asset (CG 60772).

First, the actual consideration for the disposal is reduced and treated as if it were of such an amount as would give rise to neither a gain nor a loss. Where indexation allowance is available on the disposal (see 3.59) this means that the disposal proceeds are deemed to be equal to the sum of the original cost and the indexation allowance. Then the amount of this reduction is deducted from the amount (or value used for CGT purposes) of the consideration for the acquisition of the new asset.

Example

Arthur sold a business asset qualifying for roll-over relief on 1 October 2005. The consideration for the disposal was £90,000 and incidental costs of disposal were £5,000. He acquired a replacement asset on 1 January 2007 for £84,000 and incurred incidental costs of acquisition amounting to £4,000. The total cost of acquisition is £88,000 and full roll-over relief is due because this exceeds the net proceeds of £85,000.

The net consideration of £85,000 is reduced to the sum that gives rise to neither a gain nor a loss on the disposal, and that reduction is set against the acquisition cost of the new asset.

Taper relief

The gain to be rolled over is computed before any taper relief is given. This is because taper relief applies only to ‘chargeable’ gains, and the effect of roll-over relief is to reduce the amount of a chargeable gain. On a disposal of the new asset, any taper relief will be computed by reference to the period of ownership of the new asset only. This means that for taxpayers other than companies (which are not eligible for taper relief but continue to receive indexation allowance) the benefit of any roll-over relief claim must be weighed against the potential loss of taper relief (TCGA 1992, s 2A(1); s 152(1)).

Partial relief

Some relief may be available if only a part of the consideration for the disposal of the old assets is reinvested in new assets. The part not reinvested must be less than the amount of the gain if any relief is to be obtained. In this situation:

(a) the chargeable gain is reduced to the amount not reinvested; and

(b) the amount of this reduction is deducted from the consideration for the acquisition of the new asset.

The reduction in (a) and (b) does not affect the tax treatment of the other parties to the transactions (TCGA 1992, s 153(1)).

Example

Bernard sold a qualifying asset in October 2006 for £150,000, realising a chargeable gain of £50,000. He acquired a new qualifying asset in June 2009 for £120,000. Bernard is treated in effect as having reinvested the cost of the old asset, ie £100,000, first.

The remaining £20,000 invested is treated as derived from the gain, so that £30,000 of the gain was not reinvested. The chargeable gain accruing on disposal of the old asset is reduced by £20,000 to £30,000, and the acquisition cost of the new asset is also reduced by £20,000.

Assets held on 31 March 1982

CGT was ‘rebased’ in 1988 to eliminate gains arising before 31 March 1982. A special rule applies to the ‘deferred charge’ arising where roll-over relief was obtained on a disposal before 6 April 1988 of an asset held on 31 March 1982. If no adjustment were made on the occasion of a post-1988 disposal of the new asset, the pre-1982 element of the deferred gain would be taxed. In broad terms and subject to certain exceptions, where the deferred gain accrues after 5 April 1988, it is halved (see 3.75) (TCGA 1992, Sch 4).

Deemed consideration and deemed disposals

Any provision of TCGA 1992 fixing the amount of consideration deemed to be given for the acquisition or disposal of an asset – for example, where a transaction between connected persons is treated as having a consideration equal to the market value of the asset – is applied before roll-over relief. This means that in some cases the amount that the taxpayer needs to ‘reinvest’ to secure full relief will be greater than the proceeds actually received (TCGA 1992, s 152(10)).

HMRC do not consider that relief is available where there is a deemed disposal and reacquisition of the same asset, because the deemed consideration for the deemed disposal is not available to be applied in acquiring ‘other assets’. However, relief may be available where a qualifying asset is deemed to be disposed of or deemed to be acquired. For example, gains arising when a capital sum is derived from an asset, or when an asset is appropriated to trading stock, may be the subject of a claim. A deemed acquisition of a qualifying asset, for example, acquisition of an asset as legatee, may also give rise to roll-over relief.

Expenditure reimbursed from public funds

Wardhaugh v Penrith Rugby Union Football Club [2002] 74 TC 499, Ch D established that for roll-over relief purposes the amount or value of the consideration taken to be applied in the acquisition of the new asset is the amount before any reduction under TCGA 1992, s 50. That section provides that a CGT computation excludes any expenditure met directly or indirectly by the Crown or by any government, public or local authority. HMRC argued that TCGA 1992, s 152(10) (see 14.29) applied but the court disagreed on the basis that TCGA 1992, s 50 related to the non-deductibility of acquisition expenditure. It was not a provision that fixed the amount of the consideration deemed to be given for the acquisition of an asset.

Depreciating assets

Special rules apply where the new asset are ‘depreciating assets’. The provisions of TCGA 1992, ss 152 and 153 (roll-over relief for business assets) and TCGA 1992, s 229 (roll-over relief on disposals to employee share ownership trusts) are modified and the following definitions are applied for the purpose of the special rules described below:

• the ‘held-over gain’ is the amount by which, under the normal rules, the chargeable gain on one asset (‘asset No 1’) is reduced, with a corresponding reduction of the allowable expenditure on another asset (‘asset No 2’); and
  
• where a gain of any amount is described as being ‘carried forward to any asset’, this refers to (i) a reduction of that amount in a chargeable gain, coupled with (ii) a reduction of the same amount in expenditure allowable in respect of the asset (TCGA 1992, s 154(1)).

An asset is a ‘depreciating asset’ at a particular time if it is a wasting asset (as defined in TCGA 1992, s 44) at that time, or will become a wasting asset within 10 years. TCGA 1992, s 44 provides that, subject to certain exceptions, an asset is a wasting asset if it has a predictable life not exceeding 50 years. An asset is a depreciating asset, therefore, if it has a predictable life of no more than 60 years (TCGA 1992, s 154(7)).

Postponing the held-over gain

Where asset No 2 is a depreciating asset, the gain accruing on asset No 1 is not carried forward as described above. Instead, the taxpayer is treated as if the held-over gain did not accrue until the first of the following events occurs:

• he disposes of asset No 2;
  
• he ceases to use asset No 2 for the purposes of a trade carried on by him; or
  
• the expiration of a period of 10 years beginning with the acquisition of asset No 2 (TCGA 1992, s 154(2)).

By concession, no gain is deemed to accrue under this rule where the asset ceases to be used for the purpose of the trade because of the taxpayer’s death (HMRC concession ESC D45).

Acquisition of a third asset

The taxpayer might acquire asset No 3, a non-depreciating asset, before the postponed gain is deemed to accrue as set out in 14.32. In such a case he could make a claim to roll over the gain on the disposal of asset No 1 against the acquisition cost of asset No 3. The time limits for reinvestment (see 14.35) would be regarded as met and the initial claim, relating to the acquisition of asset No 2, would be treated as withdrawn. The claim to roll-over relief against the cost of asset No 3 would be limited to the amount of the gain that was held over on the acquisition of asset No 2 (TCGA 1992, s 154(4), (5)).

The amount invested in asset No 3 may be less than the net proceeds of asset No 1. In that event the above rule might give rise to a CGT liability because only partial relief would be available. However, the taxpayer may ask for the postponed gain to be treated as derived from two separate assets. The effect would be to split the gain on disposal of asset No 1 into two parts:

• the first part being rolled over against the acquisition of asset No 3 (as in 14.25); and
  
• the second part being postponed (as in 14.32) (TCGA 1992, s 154(4), (6)).

Transfer to a European Company or Societas Europaea (‘SE’)

The treatment of the postponed gain is modified where the taxpayer transfers asset No 2, or shares in a company that holds asset No 2, to an ‘SE’ in circumstances in which TCGA 1992, s 140E (merger leaving assets within UK tax charge) applies. The postponed gain is not brought into charge. Instead, the SE is treated as though it claimed the roll-over relief (TCGA 1992, s 154(2A); F(No 2)A 2005, s 64(3)).

Reinvestment: time limits

The general rule is that the new asset must be acquired in the period beginning one year before, and ending three years after, the disposal of the old asset, but this period may be extended in some circumstances. Relief is available only if the acquisition of the new assets (or an interest in them) takes place in the period beginning 12 months before and ending 3 years after the disposal of the old assets (or an interest in them), or at such earlier or later time as HMRC may allow (see below) (TCGA 1992, s 152(3)).

An unconditional contract for the acquisition, made within the time limit, will be sufficient. The relief may be applied on a provisional basis where an unconditional contract for the acquisition is entered into, without waiting to see whether the contract is completed. Adjustments are to be made as necessary when the outcome is known. This rule is separate from the facility for the taxpayer to claim provisional relief before he has entered into any contract for acquisition of a replacement asset (see 14.41) ((TCGA 1992, s 152(4)).

Where the replacement asset is newly constructed, or represented by improvement to an existing asset, HMRC consider that the date of acquisition may be taken as the date on which the asset or the works are completed and ready for use (CG 60623).

Extension of time limits for reinvestment

HMRC guidance indicates that extension of the time limits is permitted where the claimant can demonstrate that he:

• firmly intended to acquire replacement assets within the time limit;
  
• was prevented from doing so by some fact or circumstance beyond his control; and
  
• acted ‘as soon as he reasonably could’ after ceasing to be so prevented.
  

Each case is considered on its merits. Circumstances outside the claimant’s control might include the death or serious illness of a vital party at a crucial time; unsettled disputes; difficulty in establishing good title or finding suitable replacement assets; or delay in receipt of disposal proceeds. They would not normally include a change of intention at a late stage, or a shortage of funds that arose because the taxpayer spent the proceeds on something other than new, qualifying assets (CG 60640).

The discretion available to the Board of HM Revenue and Customs has been delegated so that in the following circumstances the Area Director Compliance or the Band B Compliance Team Leader in an Area Office may allow an extension:

• in the case of land that has been disposed of under a compulsory purchase order, or is under the threat of such an order, so long as the conditions set out in statement of practice SP D6 (see below) are satisfied; or
  
• where the new asset was acquired within three years before or six years after the disposal of the old asset and there are acceptable reasons for the delay (CG 60641).

If the acquisition of the new asset took place more than a year before the disposal of the old asset, relief might still be obtained if the delay between the acquisition and the subsequent disposal occurred because of:

• the threat of compulsory acquisition of the old asset;
  
• difficulty in disposing of the old asset;
  
• the acquisition of land with the intention of building on it; or
  
• the need to have new premises functioning before the old premises could be vacated (CG 60642).

Where land is acquired by a local authority under a compulsory purchase order and leased back to the taxpayer for a period before it is developed, HMRC are prepared to extend the reinvestment time limit as indicated in statement of practice SP D6, which reads:

‘Where new town corporations and similar authorities acquire by compulsory purchase land for development and then immediately grant a previous owner a lease of the land until they are ready to commence building, [HMRC] will be prepared to extend the time limit for rollover relief under TCGA 1992, ss 152 to 158 to 3 years after the land ceases to be used by the previous owner for his trade, provided that there is a clear continuing intention that the sale proceeds will be used to acquire qualifying assets; assurances will be given in appropriate cases subject to the need to raise a protective assessment if the lease extends beyond the statutory 6 year time limit for making assessments.’

In this situation HMRC will look for evidence of the taxpayer’s continuing intention to reinvest the disposal proceeds within the extended time limit, including:

• an annual affirmation from the taxpayer or agent that such is the intention; and
  
• an assurance that the disposal proceeds remain available (though not necessarily in a completely liquid form) for the purchase. HMRC say that temporary investment of the funds even in equities or real property, ‘should not of itself be taken as making the proceeds unavailable’ (CG 60663).

HMRC also recognise that in many compulsory acquisition cases there can be a long delay between the disposal of the land and the agreement and receipt of compensation. They may extend the reinvestment time limit in such cases so that relief is available where the new assets are acquired within 12 months before and three years after the first receipt of compensation (CG 60666).

Claims

Time limits

The time limits set out below begin with the end of the year of assessment or accounting period in which the disposal takes place, or the one in which the new assets are acquired, whichever is the later. See 14.41 below regarding provisional relief. The time limits may be extended in the event of an assessment being made to recover tax lost through fraud or neglect. A claim may be made after a CGT assessment has become final.

Individuals, trustees and personal representatives

No claim to roll-over relief may be made more than five years after 31 January following the tax year to which it relates. This is the general time limit for claims (TMA 1970, s 43).

Companies

A company may make a claim within six years from the end of the accounting period to which it relates. This is the general time limit for claims to relief from corporation tax (FA 1998, Sch 18, para 55).

How to claim

A claim must be in writing and must specify:

• the claimant;
  
• the assets disposed of;
  
• the date of disposal of each of those assets;
  
• the consideration received for the disposal of each of those assets;
  
• the assets acquired;
  
• the dates of acquisition of each of those assets (or the dates on which unconditional contracts for acquisition were entered into);
  
• the consideration given for each of those assets; and
  
• the amount of the consideration received for the disposal of each of the specified assets that has been applied in the acquisition of each replacement asset (CG 60606).

HMRC provide a claim form in their self-assessment helpsheet IR 290.

Provisional relief

In some cases the CGT payable on the gain arising on the disposal may become due before a claim to roll-over relief can be established. Provisional relief is available to ensure that the funds available for reinvestment are not depleted by a payment of tax that would be recovered later. The taxpayer is required to make a declaration, in his tax return for the year of assessment (or accounting period) in which the disposal took place, that:

(a) the whole (or a specified part) of the consideration will be applied in the acquisition of, or of an interest in, other assets (‘the new assets’) which on the acquisition will be taken into use, and used only, for the purposes of the trade;

(b) the acquisition will take place as mentioned within the time limits for reinvestment set out in TCGA 1992, s 152(3) (see 14.35); and

(c) the new assets will be within the classes listed in TCGA 1992, s 155.

The declaration may be made on the form provided in HMRC’s helpsheet IR 290. Until the declaration ceases to have effect (see below), relief will be available as if the taxpayer had acquired the new assets and made a claim for relief. The rules set out in s 152 regarding partial business use, successive trades, deemed consideration and apportionments are applied accordingly (TCGA 1992, s 153A).

Declaration ceasing to have effect

The declaration ceases to have effect:

• if it is withdrawn before the ‘relevant day’, on the day on which it is withdrawn;
  
• if it is superseded by a valid claim to roll-over relief, on the day on which it is superseded;
  
• in other cases, on the ‘relevant day’ (TCGA 1992, s 153A(3)).
  

The ‘relevant day’ for CGT is the third anniversary of the 31st January following the year of assessment in which the disposal of the old assets took place. For corporation tax, it is the fourth anniversary of the last day of the accounting period in which the disposal took place (TCGA 1992, s 153A(5)).

Once a declaration has ceased to have effect all necessary adjustments are to be made, including the making or amending of assessments, irrespective of any time limits that would otherwise apply. If the taxpayer who has obtained provisional relief dies before the relevant day and before having made a valid claim to roll-over relief, HMRC will ask his personal representatives to withdraw the declaration (TCGA 1992, s 153A(4); CG 60705).

Interest and penalties

Interest may be charged on any tax ultimately found to be payable in the event that the taxpayer does not proceed with reinvestment, or partial relief only is obtained. HMRC guidance says: ‘The deterrent of frivolous declarations lies in the taxpayer’s liability to pay interest from the time the tax should have been paid if the declared intention does not lead to an acquisition. Only if, exceptionally, the declaration is clearly found to have been made fraudulently or negligently should you consider the possibility of penalties’ (CG 60704).

Interaction with other reliefs

Taper relief

Where roll-over relief is claimed, the gain to be rolled over is computed before any taper relief is given, because taper relief applies only to ‘chargeable’ gains, and the effect of roll-over relief is to reduce the amount of a chargeable gain. This means that a roll-over relief claim can result in a significant loss of taper relief.

Incorporation

Roll-over relief under TCGA 1992, s 152 takes precedence over relief on the transfer of a business to a company under TCGA 1992, s 162 (see 15.19).

Roll-over relief on the transfer of a business to a company in exchange for shares is given automatically under TCGA 1992 s 162, although the taxpayer may elect to disapply the relief on such a transfer after 5 April 2002. If a TCGA 1992, s 152 roll-over relief claim is made later, the computation of any TCGA 1992, s 162 relief given may be reopened and revised.

However, HMRC consider that this is not possible once there has been a disposal of any of the shares and an assessment of a chargeable gain on that disposal has become final and conclusive (CG 61561).

Andrew Goodall CTA is author of ‘Tottel’s Capital Tax Annual 2006-07’, from which the above article is extracted. The book is one of ‘Tottel’s Core Tax Annuals 2006-07’. The series is due to be launched in September 2006. Each of the new Core Tax Annuals costs just £19.95, or all six cost just £99.50! The Core Set comprises:

• Tottel's Corporation Tax 2006-07;
• Tottel's Capital Gains Tax 2006-07;
• Tottel's Income Tax 2006-07;
• Tottel's Inheritance Tax 2006-07;
• Tottel's Trusts and Estates 2006-07; and
• Tottel's Value Added Tax 2006-07.

To order Tottel’s Core Tax Annuals 2006-07 click here: