The Barleymows – Rollover Relief

David finds Henry, Mary and George drinking tea in the kitchen…

David: Ah good you’re all here!

He puts his notebook on the table as Mary pours him a cuppa.

Henry: We were just discussing the offer from that developer.

David: So … what are your thoughts?

George: Seems too good an opportunity to miss … that land has never performed well. It’s just …we’d get stung for tax!

Henry: Yeah, there’d be a sizeable gain …

David: That’s why Ensors mentioned Business Asset Disposal Relief.

Henry: Didn’t that used to be called Entrepreneur’s Relief?

David: Actually it’s very similar to the old Retirement Relief, remember that?

Henry and Mary nod. George looks blank.

David: If applied correctly it can reduce the rate of Capital Gains Tax (CGT) on a disposal to 10% rather than the 20% we’d otherwise pay.

George (rubs hands): Sorted!

David: But …

George: Here we go! There’s always a but …

David: Because of the way the relief works we may need to do some restricting of the business to make it work for us.

George: Sounds expensive. Any other ideas?

David: Well, a friend recently mentioned Business Asset Roll-over Relief so I called Ensors. They explained that this relief lets you defer any CGT due when you dispose of certain assets. If you acquire new assets costing the same as, or more, than the proceeds from the sale of the old asset then you can postpone paying the CGT until you dispose of the new asset …

George: Eh, I’m confused. Speak to me in numbers, lad!

Henry: I think what David’s saying is  … say if we sold the land for £1,000,000…

David (hand up): We would be taxed on a Capital Gain of roughly £800,000. Tax at 20% on this would be around £160,000…

Henry: And if we used the proceeds to build a new grain store…

George: It would be one expensive bloomin’ grain store!

Henry (interrupts): Then the gain of £800,000 rolls over.

David: To put it another way … the gain is deferred so that we don’t have to pay tax on the sale of the land at that time. If, however, we were to sell the grain store at some stage in the future, the £800,000 gain that was rolled over from the sale of land would become taxable and would be subject to the tax rate that applies when the grain store is sold, not the rate when the land was sold. So there is a risk that the rate of tax could go up over that time….

Mary: What happens if we don’t spend all the proceeds?

David: Partial relief may be available. Say if we only spend £500,000 on the new grain store, the cash retained is immediately chargeable to CGT. This would mean that we pay tax on £500,000 which would result in a tax charge of £100,000. But, we would still have deferred tax on £300,000 of the gain which would give us an instant tax reduction of £60,000.

George: Now I see. But … do we really need a new grain store?

David: Well, we can claim the relief on a new asset acquired within three years of the disposal of the old asset, so there’s time to think about how we could invest the money wisely. HMRC may grant an extension in exceptional circumstances. For example, if we can prove we were attempting to bid on some land within the three-year time limit but were unsuccessful.

George: Wouldn’t be surprised in this fickle market.

David (smiles): But Grandad, we would need to ensure that the new asset is immediately taken into use for trading purposes as soon as it is bought. HMRC will allow a short gap for any alterations or improvements required, provided the asset is not used for anything else in the meantime.

Henry: And I seem to remember you can also claim the relief on buying something 12 months prior to the disposal…

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