One of the topics that tax examiners say students struggle with is rollover relief. This area features in tax exams across various qualifications such as: ICAEW, ACCA, ATT, AAT, and CTA. Here, a Senior Kaplan Tax Lecturer breaks down this important topic.
What is ‘Rollover Relief’?
When a business sells a building used in its trade, a capital gain will arise. If the sale proceeds are reinvested in a replacement building within a period of 1 year before to 3 years after the disposal, the gain can be postponed under ‘rollover relief’.
The replacement building must also be used in the trade of the business and any sale proceeds not reinvested result in a gain that crystallises immediately.
Simple Rollover Example: Apricot Ltd
A Ltd sells an office building for £800,000, resulting in a capital gain of £350,000 in June 2019.
In June 2020, A Ltd buys a freehold office building for £700,000. The replacement office building was sold for £1 million in 2025.
Sale proceeds from the original office building retained by the company were £100,000, so £100,000 of the gain crystallises immediately.
The balance of the gain (£350,000 -£100,000) = £250,000 is postponed by deducting it from the cost of the replacement office building.
This means that the base cost of the replacement building is £700,000 -£250,000 = £450,000.
When the replacement building is sold in 2025, we use the base cost to find the gain. Gain arising in 2025 will therefore be £1 million -£450,000 =£550,000.
As the replacement building was bought after December 2017 there is no indexation allowance available.
Holdover Relief
If the sale proceeds are reinvested in a depreciating asset with a life of less than 60 years (leasehold buildings or fixed plant and machinery) then the gain is postponed under holdover relief.
Now, the gain is held over separately until the earliest of 3 events -sale of replacement, replacement obsolete and 10 years after the replacement is bought. The important thing to remember here is not to reduce the cost of the depreciating asset.
Simple Holdover Example: Apricot Ltd
A Ltd sells an office building for £800,000 resulting in a capital gain of £350,000 in June 2019.
In June 2020, A Ltd buys fixed plant and machinery for £700,000. The machinery became obsolete in 2024 and was sold for its £100,000 scrap value in 2025.
Sale proceeds from the original office building retained by the company were £100,000 so £100,000 of the gain crystallises immediately.
The balance of the gain (£350,000 -£100,000) = £250,000 is postponed under holdover relief and held over separately until the earliest of 3 events:
- Sale of replacement asset 2025
- Replacement obsolete 2024
- 10 years after the replacement is bought 2030
The gain of £250,000 will crystallise in 2024.
The cost of the machinery is unchanged at £700,000. When the machinery is sold in 2025 for £100,000, a capital loss will arise of £100,000 -£700,000= £600,000.
HMRC will not allow the company to claim the capital loss as tax depreciation in the form of capital allowances has already been given.
Tax Planning
While rollover relief postpones the gain until the replacement asset is sold, holdover relief only offers temporary relief and the gain is postponed temporarily for a maximum of 10 years.
As a result, given the choice you should recommend rollover as being preferable to holdover relief.
Capital Gains Tax (CGT) Groups
For CGT groups, the direct shareholding must be at least 75% while the indirect shareholding only has to be 51%. In addition, all group members must be UK resident. Companies in the same CGT group are treated as a single entity and gains can be rolled over between different group members.
Simple CGT Group Example: Apricot Group
Apricot Ltd owns 75% OSC of Blueberry Ltd. Both companies are UK resident.
A Ltd sells an office building for £800,000 resulting in a capital gain of £350,000 in June 2019.
In June 2020, B Ltd buys a freehold office building for £700,000.
Sale proceeds from the original office building retained by the group were £100,000 so £100,000 of the gain crystallises immediately.
The balance of the gain (£350,000 -£100,000) = £250,000 is postponed by deducting it from the cost of the building bought by B Ltd.
This means that the base cost of the replacement building is £700,000 -£250,000 = £450,000.
Given the above, you can now understand rollover relief and can easily pick up marks on this popular exam topic.
Neil Da Costa is a Senior Tax Lecturer with Kaplan. He believes in keeping things simple and rigorous exam question practice. He is the author of Advanced Tax Condensed, which consists of a set of memory joggers designed to be used with the Kaplan Study Notes and Exam Kit.