November 2020
Neil Da Costa endeavours to make a complicated subject very simple.
Here, I am going to show you how to keep it simple. Having been an Advanced Tax lecturer for more than 20 years I am fully aware of the areas examiners say that students struggle with.
These areas feature regularly in the tax exams and by ensuring you understand them you can be confident of earning these marks in the question. In this article I will be showing you how to deal with rollover relief using simple examples.
Rollover relief
When a business sells a building used in its trade, a capital gain will arise. If the sale proceeds are reinvested in a replacement building within a period of one year before to three years after the disposal, the gain can be postponed under rollover relief.
The replacement building must also be used in the trade of the business and any sale proceeds not reinvested result in a gain crystallising immediately
Simple example: Apricot Ltd
A Ltd sells an office building for £800,000, resulting in a capital gain of £350,000 in June 2019.
In June 2020, A Ltd buys a freehold office building for £700,000. The replacement office building was sold for £1 million in 2025.
Sale proceeds from the original office building retained by the company were £100,000, so £100,000 of the gain crystallises immediately.
The balance of the gain (£350,000 – £100,000) = £250,000 is postponed by deducting it from the cost of the replacement office building.
The means that the base cost of the replacement building is £700,000 – £250,000 = £450,000.
When the replacement building is sold in 2025, we use the base cost to find the gain.
Gain arising in 2025 will therefore be £1 million – £450,000 = £550,000.
As the replacement building was bought after December 2017 there is no indexation allowance available.
Holdover relief
If the sale proceeds are reinvested in a depreciating asset with a life of less than 60 years (leasehold buildings or fixed plant and machinery) then the gain is postponed under holdover relief.
Now, the gain is held over separately until the earliest of three events: sale of replacement, replacement obsolete and 10 years after the replacement is bought. The important thing to remember here is not to reduce the cost of the depreciating asset.
Simple example: Apricot Ltd
A Ltd sells an office building for £800,000, resulting in a capital gain of £350,000 in June 2019.
In June 2020, A Ltd buys fixed plant and machinery for £700,000. The machinery became obsolete in 2024 and was sold for its £100,000 scrap value in 2025.
Sale proceeds from the original office building retained by the company were £100,000, so £100,000 of the gain crystallises immediately.
The balance of the gain (£350,000 – £100,000) = £250,000 is postponed under holdover relief and held over separately until the earliest of three events:
1: Sale of replacement asset 2025.
2: Replacement obsolete 2024.
3: 10 years after the replacement is bought 2030.
The gain of £250,000 will crystallise in 2024.
The cost of the machinery is unchanged at £700,000. When the machinery is sold in 2025 for £100,000, a capital loss will arise of £100,000 – £700,000 = £600,000.
HMRC will not allow the company to claim the capital loss as tax depreciation in the form of capital allowances has already been given.
Tax planning
While rollover relief postpones the gain until the replacement asset is sold, holdover relief only offers temporary relief and the gain is postponed temporarily for a maximum of 10 years.
As a result, rollover is preferable to holdover relief.
Capital Gains Tax Groups
For CGT groups, the direct shareholding must be at least 75%, while the indirect only has to be 51%. Companies in the same CGT group are treated as a single entity and gains can be rolled over between different group members.
Simple example: Apricot Ltd
Apricot Ltd owns 75% OSC of Blueberry Ltd. Both companies are UK resident.
A Ltd sells an office building for £800,000 resulting in a capital gain of £350,000 in June 2019.
In June 2020, B Ltd buys a freehold office building for £700,000.
Sale proceeds from the original office building retained by the group were £100,000 so £100,000 of the gain crystallises immediately.
The balance of the gain (£350,000 – £100,000) = £250,000 is postponed by deducting it from the cost of the building bought by B Ltd.
The means that the base cost of the replacement building is £700,000 – £250,000 = £450,000.
You have now understood rollover relief and can easily pick up marks on this popular exam topic.
• Neil Da Costa is a Senior Tax Lecturer with Kaplan.
