Rollover relief

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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:

  1. The new and old assets must be used for business purpose.

  2. You have to replace the asset 12 months prior to the sale or 36 months post the sale.

  3. 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

  1. 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 asset

  2. Step 2 - Calculate the Capital gain

    Disposal proceeds                       X
    The Original Purchase costs       (X)
    Legal fees                                   (X)
    Chargeable gains                          X

  3. Step 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                              X

  4. Step 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.

  5. 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)

  6. 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 2024.

The warehouse had been purchased for £150,000.

Peter incurred legal fees of £10,000 in connection with the purchase.

On 1 February 2024, he bought another freehold factory for £100,000.

Required:
Calculate the Capital gain.

Step by step answer

  1. 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) = £10,000

    About the NEW asset:
    - Purchase costs of the NEW asset = £100,000

  2. Step 2 - Calculate the Chargeable gain

    Disposal proceed                       200,000
    The Original Purchase costs       (150,000)
    Legal fees                                   (10,000)
    Chargeable gain                          40,000

  3. Step 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                              100,000

  4. Step 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 2024.

The warehouse had been purchased for £150,000.

On 1 February 2024, he bought a freehold factory for £200,000.

Required:
Calculate the Chargeable gain.

Step by step answer

  1. Step 1 - Get the information

    About the OLD asset:
    - Disposal proceeds of the OLD asset = £300,000
    - Original purchase costs of the OLD asset = £150,000

    About the NEW asset:
    - Purchase costs of the NEW asset = £200,000

  2. Step 2 - Calculate the Chargeable gain

    Disposal proceed                       300,000
    The Original Purchase costs       (150,000)
    Chargeable gain                          150,000

  3. Step 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                              100,000

  4. Step 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

  5. 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 30/06/2023 for £350,000.

This office cost him £100,000.

He bought another business office for £250,000 on 31/12/2023.

  • 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 06/06/2023.

He bought another property for use in his business on 12/12/2023 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

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