When selling a business asset, one of the biggest concerns for many business owners is the Capital Gains Tax (CGT) that may arise on the disposal.
However, if the proceeds are reinvested into new business assets, rollover relief may allow you to defer the gain and delay paying CGT.
This is because rather than paying tax immediately, the gain is effectively rolled into the cost of the replacement asset, reducing its base cost for future CGT calculations. The tax is, therefore, postponed until the replacement asset is eventually sold.
For many businesses, this relief can provide valuable flexibility when upgrading equipment, relocating premises or reinvesting in new trade assets.
Understanding how rollover relief works can help you manage tax liabilities more effectively while continuing to invest in growth.
Basic conditions for rollover relief
To qualify for rollover relief, certain conditions must be met. The taxpayer must:
- Dispose of an old qualifying asset used solely for the purposes of a trade throughout the ownership period
- Reinvest the disposal proceeds into new qualifying assets
- Ensure the new assets are taken into use solely for the purposes of the trade
- Acquire the new assets within the permitted reinvestment window
In most cases, the replacement asset must be acquired within 12 months before or three years after the disposal of the old asset.
Importantly, it is not necessary to trace the exact disposal proceeds into the new investment.
If the replacement asset is acquired within the statutory time limit, HMRC generally assumes the proceeds have been reinvested.
Where transactions take place between connected parties, the disposal value is treated as market value rather than the actual sale price.
Which assets qualify for rollover relief?
Both the asset sold and the replacement asset must fall within certain qualifying categories.
These include:
- Land and buildings occupied and used for the purposes of a trade
- Permanent or semi-permanent business structures
- Fixed plant or machinery not forming part of a building
- Ships aircraft and hovercraft
- Goodwill in some circumstances
- Agricultural quotas and certain farming entitlements
- Fishing quotas
- Certain specialist assets such as space vehicles
However, shares and securities do not qualify for rollover relief.
Trade use requirements
Both the old and replacement assets must be used for trading purposes.
For example, land or buildings must be occupied as well as used for the trade and the replacement asset must be brought into use for the trade as soon as possible after acquisition.
HMRC may allow a short delay if the property requires alterations or improvements before being used, provided it is not used for any other purpose during that period.
For sole traders, the replacement asset does not have to be used in the same trade as the original asset. Successive or simultaneous trades are generally treated as a single trade for rollover relief purposes.
When is relief restricted?
Full rollover relief is only available if all of the proceeds from the disposal are reinvested in new qualifying assets.
If part of the proceeds is retained or used elsewhere, the relief will normally be restricted proportionately.
Other situations may also restrict the amount of relief available, including:
- Where the asset was only used for trade purposes during part of the ownership period
- Where only part of a building is used for a trade
- Where the replacement asset is partly used for non-trading purposes
In these cases, the gain must be apportioned on a just and reasonable basis.
Special rules for depreciating assets
If the replacement asset has a predictable life of 60 years or less such as certain items of plant and machinery, it is treated as a depreciating asset.
In these cases, the gain is not deducted from the cost of the replacement asset. Instead, it is frozen and will crystallise at the earliest of:
- Disposal of the replacement asset
- The asset ceasing to be used for trade purposes
- Ten years after the asset was acquired
If another qualifying non-depreciating asset is purchased before this point, the gain may be rolled over again.
Group rollover relief
Companies within a capital gains group can benefit from rollover relief where one group member disposes of an asset and another acquires the replacement asset.
For CGT purposes, the group is treated as a single entity provided the companies are part of the group at the time of the relevant transactions.
This can be particularly helpful where business assets are transferred or reinvested across different companies within a corporate structure.
Claiming rollover relief
A claim for rollover relief must be made within four years of the later of:
- The end of the tax year or accounting period for companies in which the asset was disposed of
- The end of the period in which the replacement asset was acquired
Claims must be made in writing and must include details such as:
- The taxpayer’s identity and Unique Taxpayer Reference
- Details of the asset disposed of
- The disposal date and proceeds
- Details of the replacement asset
- The acquisition date and cost
- The amount of proceeds reinvested
Individuals can also use the optional claim form in HMRC Helpsheet 290.
If you are considering selling a business asset and reinvesting the proceeds it is worth seeking professional advice early to ensure you structure the transaction in the most tax-efficient way. To find out how we can help you with this relief, please speak to our team.