- On the takeover Richard received new ordinary shares valued at £80,000 (2 x 10,000 x £4.00) and cash of £25,000.
- The cost attributable to the cash element is £5,500 (23,100 x 25,000/(25,000 + 80,000)).
Rollover relief allows a chargeable gain to be deferred (rolled over) where the disposal proceeds of the old asset are reinvested in a new asset. The deferral is achieved by deducting the chargeable gain from the cost of the new asset.
To qualify for rollover relief both the old asset and the new asset must be qualifying assets. The most relevant types of qualifying asset as far as Paper F6 (UK) is concerned are:
- Land and buildings
- Fixed plant and machinery
It is not necessary for the old asset and the new asset to be in the same category.
What are the conditions that must be met in order that rollover relief can be claimed?
- The reinvestment must take place between one year before and three years after the date of disposal.
- The old and new assets must both be qualifying assets and be used for business purposes.
- The new asset must be brought into business use at the time that it is acquired.
Where the disposal proceeds of the old asset are not fully reinvested in the new asset, the amount not reinvested reduces the amount of chargeable gain that can be rolled over. Therefore if the amount not reinvested is greater than the chargeable gain no rollover relief is available.
Where the new asset is a depreciating asset, then the gain does not reduce the cost of the new asset but is instead held over. A depreciating asset is an asset with a predictable life of less than 60 years. The only types of depreciating asset that you need to be aware of are fixed plant and machinery and short leaseholds.
Violet sold a factory on 15 August 2014 for £320,000, and this resulted in a chargeable gain of £85,000. She is considering the following alternative ways of reinvesting the proceeds from the sale of her factory:
- A freehold warehouse can be purchased for £340,000.
- A freehold office building can be purchased for £275,000.
- A leasehold factory on a 40-year lease can be acquired for a premium of £350,000.
- A freehold factory can be purchased for £230,000.
The reinvestment will take place during November 2014.
- The sale proceeds are fully reinvested, and so the whole of the chargeable gain can be rolled over.
- The base cost of the warehouse will be £255,000 (340,000 – 85,000).
Freehold office building
- The sale proceeds are not fully reinvested, and so £45,000 (320,000 – 275,000) of the chargeable gain cannot be rolled over.
- The base cost of the office building will be £235,000 (275,000 – (85,000 – 45,000)).
- The sale proceeds are fully reinvested, and so the whole of the chargeable gain can be held over.
- The factory is a depreciating asset, and so the base cost of the factory is not adjusted.
- The chargeable gain is held over until the earlier of November 2024 (10 years from the date of acquisition), the date that the factory is sold, or the date that it ceases to be used in the business.
- No rollover relief is available as the amount not reinvested of £90,000 (320,000 – 230,000) exceeds the chargeable gain.
- The base cost of the factory will remain at £230,000.
When the asset disposed of was not used entirely for business purposes then the proportion of the chargeable gain relating to the non-business use does not qualify for rollover relief.
Willow sold a freehold factory on 8 November 2014 for £146,000, and this resulted in a chargeable gain of £74,000. The factory was purchased on 15 January 2012. 75% of the factory had been used for business purposes by Willow as a sole trader, but the other 25% was never used for business purposes. Willow purchased a new freehold factory on 10 November 2014 for £156,000.
Willow’s chargeable gain for 2014–15 is as follows: