Q&A: rollover relief on property gain

Croner VIP Tax Team

In this week’s Q&A, Marsha Haywood, adviser at Croner VIP Tax Team, explains the rollover relief on a business sale of a property.

Q. My client, a sole trader, has sold a yard which was used in his haulage business and then took out a 20-year lease on a replacement yard. Can he claim rollover relief on the gain? He intends to use the new yard in his business for 20 years as this should then take him into retirement.

A. Rollover relief is available when a business asset is sold and replaced with another. The legislation is found at section 152, Taxation of Chargeable Gains Act (TCGA 1992) onwards. If all proceeds from the sale are reinvested rollover relief is available in full.

As this is a deferral relief, the gain is taxed when the new asset is sold, achieved by reducing the base coat of the new asset by the amount of the gain arising on the disposal of the old one.

Where proceeds are not fully reinvested, the amount retained is immediately chargeable to capital gains tax (CGT). If the cash retained exceeds the gain, rollover relief is not available.

Section 155 provides a list of assets that qualify for rollover relief. Both the asset sold and the asset purchased must be qualifying assets, although not necessarily the same category. Land is a qualifying asset and therefore rollover relief can be considered.

However, there are slightly different rules when a depreciating asset is purchased. A depreciating asset is one with a useful life not exceeding 60 years. As the lease is for 20 years in this case, this will be a depreciating asset.

In this situation, relief is given by freezing the gain on the old asset for a certain period of time rather than it reducing the base cost of the new asset. As per s154, the frozen gain crystallises on the earlier of three events:

• the disposal of the replacement asset;

• when the replacement asset is no longer used for the purposes of the trade; or

• 10 years after the acquisition of the depreciating asset.

Therefore, as your client is intending to use the new yard in his haulage business for the full 20 years of the lease, the frozen gain will become chargeable in 10 years’ time.

Again, this is restricted if only part of the proceeds is reinvested. The amount not reinvested is chargeable to CGT straightaway.

Further information is available in Croner Navigate guidance on rollover relief at 570-100 onwards.