CAT / FIA FTX Syllabus D. Capital Gains Tax - Rollover relief - Notes 3 / 4
Rollover relief (The replacement of business assets)
If you sell your warehouse and buy a new one, you can decrease the Capital gain by deducting the new warehouse's purchase costs.
Conditions:
The new and old assets must be used for business purpose.
You have to replace the asset 12 months prior to the sale or 36 months post the sale.
No Rollover relief is available if the amount not reinvested exceeds the chargeable gain. (See below)
Qualifying assets:
Land and buildings.
Fixed plant and machinery.
Step by step approach
Step 1 - Get the information
About the OLD asset:
- Disposal proceeds of the OLD asset
- Original purchase costs of the OLD asset
- Any costs relating to the sale or the purchase of the asset (e.g. legal fees)About the NEW asset:
- Purchase costs of the NEW assetStep 2 - Calculate the Capital gain
Disposal proceeds X
The Original Purchase costs (X)
Legal fees (X)
Chargeable gains XStep 3 - Calculate how much is NOT reinvested
Disposal proceeds - Purchase costs of the NEW asset
How much you get for the OLD asset X
How much you pay for the NEW asset (X)
Amount NOT reinvested XStep 4 - Check whether the amount NOT reinvested (Step 3) exceeds the Chargeable gain (Step 2)
No Rollover relief is available if the amount NOT reinvested exceeds the chargeable gain.
Step 5 - Calculate the new Chargeable gain
Disposal proceed X
The Original Purchase costs (X)
Chargeable gain X
Rollover relief (Balancing figure) (X)
The new Chargeable gain (Step 3) X (proceeds not reinvested)Step 6 - Calculate Base cost
Basically, the Purchase costs of the NEW asset less the Rollover relief
This base cost will be used as the cost of the new office when it is disposed of in the future.
Illustration 1
Peter sold a freehold warehouse for £200,000 on 1 January 2025.
The warehouse had been purchased for £150,000.
Peter incurred legal fees of £10,000 in connection with the purchase.
On 1 February 2025, he bought another freehold factory for £100,000.
Required:
Calculate the Capital gain.
Step by step answer
Step 1 - Get the information
About the OLD asset:
- Disposal proceeds of the OLD asset = £200,000
- Original purchase costs of the OLD asset = £150,000
- Any costs relating to the sale or the purchase of the asset (e.g. legal fees) = £10,000About the NEW asset:
- Purchase costs of the NEW asset = £100,000Step 2 - Calculate the Chargeable gain
Disposal proceed 200,000
The Original Purchase costs (150,000)
Legal fees (10,000)
Chargeable gain 40,000Step 3 - Calculate how much is NOT reinvested
How much you get for the OLD asset 200,000
How much you pay for the NEW asset (100,000)
Amount NOT reinvested 100,000Step 4 - Check whether the amount NOT reinvested (Step 3) exceeds the Chargeable gain (Step 2)
Amount NOT reinvested (Step 3) = £100,000 > Chargeable gain (Step 2) = £40,000
No Rollover relief is available if the amount NOT reinvested exceeds the Chargeable gain.
Therefore the Chargeable gain will be £40,000.
Illustration 2
Peter sold a freehold warehouse for £300,000 on 1 January 2025.
The warehouse had been purchased for £150,000.
On 1 February 2025, he bought a freehold factory for £200,000.
Required:
Calculate the Chargeable gain.
Step by step answer
Step 1 - Get the information
About the OLD asset:
- Disposal proceeds of the OLD asset = £300,000
- Original purchase costs of the OLD asset = £150,000About the NEW asset:
- Purchase costs of the NEW asset = £200,000Step 2 - Calculate the Chargeable gain
Disposal proceed 300,000
The Original Purchase costs (150,000)
Chargeable gain 150,000Step 3 - Calculate how much is NOT reinvested
How much you get for the OLD asset 300,000
How much you pay for the NEW asset (200,000)
Amount NOT reinvested 100,000Step 4 - Check whether the amount NOT reinvested (Step 3) exceeds the Chargeable gain (Step 2)
Amount NOT reinvested (Step 3) = £100,000 < Chargeable gain (Step 2) = £150,000
Step 5 - Calculate the new Chargeable gain
Disposal proceed 300,000
The Original Purchase costs (150,000)
Chargeable gain 150,000
Rollover relief (balancing figure) 150,000 - 100,000 = (50,000)
The new Chargeable gain (Step 3) 100,000
Illustration 3
Jeremy sold his business office on 30/06/2024 for £350,000.
This office cost him £100,000.
He bought another business office for £250,000 on 31/12/2024.
How much of his capital gain can be rolled over?
What is the base cost of his new business office?
Solution:
Disposal proceeds £350,000
Acquisition cost (£100,000)
Chargeable gain £250,000
Rollover relief (balancing figure) (250,000 - 100,000) (£150,000)
Capital gain now (w1) (proceeds not reinvested) £100,000
W1: Proceeds not reinvested
Old office sale proceeds £350,000
New office costs (£250,000)
Capital gain to be realised now £100,000
Base cost of new business office:
Cost of new office £250,000
Rollover relief (£150,000)
Base cost of new office £100,000
This base cost will be used as the cost of the new office when it is disposed of in the future.
Qualifying assets that are not fully used in the business
Assets that are not used in the business entirely will have restrictions for roll over relief on sale.
The amount of gain that cannot be rolled over, and must be realised now is:
% of asset not used in business * Chargeable gain.
Illustration
Jeremy had another property purchased for use in his business.
However, he did not require the entire property for his business and rented out 20% of the property.
The property cost him £400,000 on 06/06/2012 and he sold it for £800,000 on 06/06/2024.
He bought another property for use in his business on 12/12/2024 for £900,000. He will use 100% of this property for his business.
How much of his capital gain can be rolled over?
What is the base cost of his new business office?
Solution:
Disposal proceeds £800,000
Acquisition cost (£400,000)
Chargeable gain £400,000
Rollover relief (400,000 - 80,000) (£320,000)
Capital gain now (W1) £80,000
W1:
Chargeable gain £400,000
All proceeds relating to the business element of the property were reinvested (80%*£800,000) BUT 20% of the property was not used in business (£80,000 = 20% * £400,000) Therefore, Rollover relief is restricted to £320,000 (£400,000 - £80,000)
Base cost of new business office:
Cost of office £900,000
Gain to be rolled over (£320,000)
Base cost of new office £580,000