CAPITAL GAINS - 28.05.2020

Downsizing your business premises - defer your tax bill

Our subscriber’s business no longer needs such a big premises so he wants to downsize. Despite current market conditions, he expects to get more for the property than he paid for it. Can he avoid a tax bill on the capital gain?

Replacing business assets

Almost since the introduction of capital gains tax (CGT) in the 1960s the government has recognised the need for businesses to preserve capital. If they had to pay tax when selling a business asset which they intended to replace, e.g. trading premises, it would stifle growth. Therefore, a special tax relief for replacement of business assets called “rollover relief” prevents this.

Qualifying transaction

Any trading business, whether run by a company, individual or partnership, can claim rollover relief where it makes a capital gain from selling a qualifying asset. Where claimed, the gain is rolled over into the replacement asset. This works by reducing the cost of the new asset for tax purposes. The effect, metaphorically, is to kick the can down the road until such time when the replacement asset is sold. Even then the gain can be rolled over into another replacement asset.

Tip. The replacement asset doesn’t have to be of the same type as the old one. For example, a gain made from the sale of land can be rolled over to the purchase of, say, plant.

For detailed commentary on qualifying assets, visit http://tipsandadvice-tax.co.uk/download (TX 20.17.05).

Downsizing

As a reliable rule of thumb, rollover relief for the full capital gain made from the sale of an asset is allowed where the cost of the replacement asset is equal to or greater than the proceeds from the old one. However, partial rollover reliefs are allowed where the replacement assets cost less.

Example. Acom Ltd bought a warehouse 25 years ago for £40,000. It’s received an offer of £200,000 for the property from a developer. The resulting capital gain, taking account of indexation (HMRC’s adjustment to increase the cost to take account of inflation up to December 2017), is £125,640. Acom buys a smaller property costing £150,000. It can only claim partial rollover relief as it has not used all the proceeds to buy the new asset. Acom’s taxable gain is £50,000, i.e. the proceeds less the amount used to buy the replacement asset (£200,000 - £150,000). Only the remainder £75,640 (£125,640 -£50,000) is rolled over.

Tip. If later Acom buys other qualifying assets (within the time limit) it can roll over more of the gain. For example, if it spent the whole £50,000, i.e. the proceeds it didn’t spend on the new warehouse, it could reclaim all the tax it paid on the original gain. To qualify, replacement assets must be bought within the period starting twelve months before and ending 36 months after the date of the capital gain for which you are claiming rollover.

Timing your claim

If you expect to spread the purchase of replacement assets over, say, a few years, delay finalising your rollover claim for as long as possible, i.e. until you’re sure you’re not going to buy any more qualifying assets. This will allow you to allocate rollover relief in the most tax-efficient way (see The next step ).

For how to allocate rollover relief efficiently, visit http://tipsandadvice-tax.co.uk/download (TX 20.17.05).

A taxable capital gain can’t be avoided but it’s possible to defer it using rollover relief. If the new property cost more than the proceeds, the whole gain could be deferred, but because our subscriber is downsizing he can only roll over (defer) part of it. It won’t become chargeable until the new property is sold.

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