Rollover Reliefs

Transfer of business to company

There is an important relief from capital gains tax, where a business is transferred from an individual into his  company. This is designed to assist sole traders and partners form tax consequences when they incorporate and transfer their business to a company.

The business must be transferred as a going concern. The person need not work in the business. The business must be transferred in return for shares in the company issued to him.

The transfer of the assets would otherwise  be subject to capital gains tax.  In effect, the gain is deferred, until the shares are disposed of.  The gain is taken into account in the deemed acquisition cost of the shares.

Conditions for Relief

The following conditions must be complied with

• the business must be transferred from a person to a company as a going concern
• all assets other than cash must be transferred;
• the transfer must be wholly or partly for shares in the new company;
• it must be done for the commercial reasons and not for tax avoidance reasons.

Where part of the price received in return is taken other than in shares (e.g. in cash) a proportion of the relief only is granted.  In effect, the amount of the relief is added to the value of the shares. Therefore when the shares are disposed of, the acquisition cost is increased and the full gain is reflected. In this way, the gain is deferred.

Rollover Relief

The main rollover relief is now largely historical and can apply only in certain cases where the original rollover took place before the legislation was amended in 2002.

When the lower 20% (now 33%) rates of capital gains tax was introduced at the  turn-of-the-century, many of the reliefs that formerly existed and were removed or limited. Rollover relief applied to trading assets and certain other assets.

It applied when assets of one type were replaced with assets  within the same or certain other classes. The relief does not apply to disposals after 2002.The relief still has consequences where there is a disposal of an asset which was purchased after a roll over.

Land and Buildings

Land and building used for the purpose of trade,  plant, machinery and goodwill qualified for roll over relief. When an asset was sold and all of the proceeds are reinvested in other such assets, then there was deemed to be no disposal. The effect is that tax was postponed, by way of a deemed reduction in the acquisition cost. If the whole proceeds are not reinvested, then there is an immediate tax liability in respect of this part.

The effect of rollover relies meant there was no immediate tax charge. In effect be tax is held in abeyance until the replacement asset is sold and not reinvested. Alternatively the  tax will arise if the assets cease to be used for the purpose of the business’ trade.

The reinvestment asset need not have been in the same category but could be in any of the above three categories.  The new asset must be used for the same or a similar trade The reinvestment had  generally to take place within a period of four years, beginning 12 before the development for ending two months after the disposals. Rollover relief was allowed on the replacement asset in due course.

The significance of the above relief is that it may still apply where the capital gains tax has been deferred and is no longer reinvested in the above categories of qualifying assets.

Investment of Compensation

Where assets are entirely destroyed or lost the receipt compensation/insurance proceeds will be relieved from capital gains tax provided it is reinvested in replacement assets within one year. The destroyed assets is deemed to be disposed of at price that gives rise  to no gain or loss. The price paid for the replacement asset is is deemed reduced by the excess of the compensation plus scrap value over the value of the old asset.

Where a capital sum received by way of compensation for loss of or damage to an asset there is deemed to be a part or complete disposal for capital gains tax purposes. Rollover relief is available if the money is received in compensation I use to purchase a replacement asset or to restore or repair the asset.

Where there is partial loss leading to a payment of compensation there is potentially deemed a part disposal. However if the whole compensation sums are used to restore it in full there is relief against the capital gain that would otherwise apply.

If there is a partial reinvestment there is no only relief if the amount which is not reinvested exceeds the deemed gain. Where there ispartial reinvestment and the amount not reinvested does not exceed again the acquisition cost of the replacement asset is reduced by the rest of the gain.

Finance Act 2023

Finance Act 2023 amends the deferment of the charge to CGT which arises on the receipt of compensation or insurance money for damage to or destruction of assets, or of sums for the forfeiture or surrender of rights or for the use or exploitation of assets, if the compensation or money received is used in restoring or replacing the asset in question, subject to certain conditions.

The purpose is to confirm that the deferment opportunity provided for does not apply in the case of a disposal or deemed disposal to an authority which possesses compulsory purchase powers, where the disposal takes place on foot of the authority exercising those powers, or by the authority giving formal notice of its intention to exercise those powers.