All references below are to TCGA 1992 unless stated otherwise.
Rollover relief (s152) can be complicated and requires care and attention to ascertain whether it is available on the asset being disposed of (the “old” asset) and what conditions have to be met for the replacement asset (the “new” asset).
The relief operates by reducing the allowable cost of the “new” asset by the qualifying gain on the “old” asset. The relief is restricted where the proceeds are not fully reinvested in the acquisition of the “new” asset. Similarly, where an asset has not been used solely for the trade, the quantum of the gain that can be “rolled-over” will be restricted as per s152(6) and s152(7).
All trades carried on by the same person either concurrently or successively are treated, for these purposes only, as a single trade (s152(8)). As such, it is possible for an individual or company to sell an asset used in one trade and acquire an asset to be used in a different trade, but the same person must run the trades.
The basic requirement for relief is that the “old” asset must be used and used only for the purposes of a trade (s152(1)) carried on by the vendor. Herein lies the first problem in that your client does not carry on the trade, their personal company does (but see the references to s157 and s158 below).
The “new” asset acquired must be a qualifying asset as outlined in s155. A FHL can also be a qualifying asset for rollover relief by virtue of s241 – see HMRC’s guidance at CG60287.
Although your client does not carry on the trade in which the property is used, s152 is extended by s157 and s158.
S157 provides that where an asset is held by an individual in a personal capacity but used in their “personal” company (one where they can exercise more than 5% voting power), rollover relief is available if the new asset is also used in the same company’s trade. It will be extremely difficult to make a sustainable argument that a personally owned FHL is a trade being carried on by the personal company.
S158(1)(c) provides that where an asset is used in an office or employment, rollover relief can still apply for a newly acquired personal qualifying asset. Is the asset used in the office or employment of your client? HMRC’s Statement of Practice SP5/86 states that HMRC are prepared to accept rollover relief providing no payment (including rent) was made to your client by the company for its occupation. Therefore, providing no rent is received, rollover relief may be due under s158.
The additional problem with acquiring a FHL for rollover relief purposes is that it will not be known for certain that the property is a qualifying FHL until the first 12 months of letting have expired- s324(2) ITTOIA 2005. S241 confirms that the income tax rules for a qualifying FHL still apply to determine whether there is a qualifying FHL for CGT purposes. Therefore, a provisional rollover relief claim may need to be made under s153A TCGA 1992 until the first 12 months of letting have elapsed and the qualifying conditions are then checked
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