Rollover relief is a popular topic in the Advanced Tax exam and tends to feature mostly in questions on companies.
The gain on the old building is given such as £50,000 and the sale proceeds as well £200,000.
If £190,000 is invested in a replacement freehold building, then £10,000 of the original gain crystallizes immediately while the balance of the gain £40,000 is deferred until the replacement building is sold.
The base cost of the replacement building now becomes (190,000-40,000) = £150,000 and is use when the replacement asset is sold in the future.
On the other hand, if the replacement asset is a depreciating asset with a life of 60 years or less (fixed plant and machinery or a leasehold building) the gain is postponed temporarily under holdover relief.
It is important not to reduce the cost of the depreciating asset. The gain of £40,000 is suspended separately until the earliest of 3 events: sale of replacement, replacement obsolete or 10 years after the replacement is bought. This means that even if the company is using the depreciating asset after 10 years, the help over gain will become taxable.
A tricky area is rollover relief on intangible assets. This works the same way as rollover relief on buildings with a few important exceptions. The amortisation on intangibles except for goodwill is an allowable expense in computing taxable profits. When an intangible is sold, the capital gain is treated as extra trading profits. It is possible to defer paying tax on these extra trading profits by reinvesting in a replacement intangible e.g., sell a patent and reinvest in a replacement patent.
As the company has already deduced the amortisation from its taxable profits, HMRC now clawback this deduction when the intangible is sold. This means that the extra trading profits will be the sale proceeds not reinvested and the amortisation previously claimed.