Rollover relief pitfalls: What farm businesses need to know

Business asset rollover relief allows capital gains tax to be deferred when selling land, buildings or fixed plant and machinery by buying a new qualifying asset.

It is available only on assets used in a trading business and careful consideration is needed before sale proceeds are reinvested if maximising relief is the objective.

See also: Why valuation preparation is key under new IHT relief regime

The tax becomes payable when the replacement asset is sold, so tax planning should be done with this in mind.

Capital gains tax (CGT) is a self-assessed tax, so it’s up to the taxpayer to calculate the size of the gain and make a claim, usually with the help of an adviser.

The tax is charged on individuals rather than businesses, currently at 18% for standard rate taxpayers and 24% for those paying higher rate income tax.

“Business asset rollover relief [Barr] should be one of the simplest pieces of tax legislation, but it has many pitfalls and restrictions that can catch out taxpayers,” says Keith Johnston, senior tax manager at accountant Armstrong Watson.

These include the need for careful checks on how both the sale assets and the new assets are used to ensure they qualify, and to calculate the tax impact if some do not meet the requirements.

Use of old asset

Assets only qualify for Barr if they have been used in a trading business, so anything rented out, such as houses and cottages, workshops, offices or storage units, does not qualify for rollover relief as these are investment assets.

Relief is restricted if part of the asset sold was only used for business purposes for part of the time it was owned.

“For example, if a block of land was rented out under a farm business tenancy for, say, five years, then you would have to calculate for this and exclude the gain made in that period on that portion of the asset,” says Keith.

New asset qualification

The new asset must be used for the purposes of a trade, with the owner taking commercial risk.

If land is let on a grazing licence, then the landowner must be involved in the husbandry of the land – for example, applying fertiliser and controlling weeds – and not simply receiving a fixed income.

“Failure to do this will mean HMRC will disallow the rollover claim and charge the tax in full,” warns Keith

To roll over the whole of a capital gain, all of the proceeds of a sale must be reinvested in qualifying assets.

“If only part of the proceeds are reinvested, the taxable capital gain is the amount not reinvested.

“For example, if an asset is sold for £1m, and this includes a gain of £400,000 but only £900,000 is reinvested, there is a chargeable capital gain of £100,000, which is the portion that was not reinvested.”

Livestock and moveable machinery do not qualify for rollover relief, so if sale proceeds are used to buy these, part of the gain will be taxable.

Similarly, using the proceeds to pay off business loans means that only part of the sale proceeds will be reinvested, making part of the gain taxable.

This aspect catches people out, says Keith.

Who is buying the new asset?

The replacement assets must be bought by the person who sold the old asset.

If someone sells a solely owned farm and buys the new farm jointly with their spouse (for example, to equalise asset ownership with inheritance tax in mind) they would only be able to roll over half of the sale proceeds, leading to a large CGT bill, warns Keith.

“The answer to this is to transfer the farm being bought into joint names after the purchase – there is no qualifying period before this can be done.”

Use of the new asset

The replacement asset does not have to be used in the same type of business as the old one, it must simply be used in a trade in the same ownership as the old asset, rather than as an investment.

However, the new asset must be “immediately taken into use for the purpose of the business”, says the rollover legislation.

So, if a short-term tenancy or commercial lets are in place when the new farm is bought, this part will not qualify for Barr.

“If part of the asset needs repairing or renovating, it can still qualify as long as the work is done as soon as practicably possible.”

Company considerations

Keith points out that some of the rules are different for companies – for example, if the old asset has been owned by an individual but used by their farming company, then this same company must buy and use the new asset for business purposes.

Time limits

No matter what business structure is used, the new asset must be bought no more than 12 months before the old asset is sold and three years after, with exchange of contracts being the key date rather than completion.

It is possible to ask HMRC to extend these limits – for example, if transactions are delayed by circumstances outside the taxpayer’s control or if they are unable to find suitable assets to purchase in time.

A provisional rollover claim can be made if the new asset has not been bought at the time the tax is due for payment, otherwise HMRC expects the tax to be paid.

Keith points out, though, that if ultimately no new asset purchase is made, the tax becomes due with interest payable, currently at 7.75%, from the original tax due date.

Rollover relief must be claimed within four years of the end of the tax year in which the new asset was bought, or the old one sold, if that happened after the purchase of the new asset.