Detailed rollover relief question including time limits
Question:
We sold our nursery business on 1 October 2006 for £330,000. The capital gain was calculated and returned to the tax office £52,457.
A Limited Co was formed on 27 June 2004 to develop and run a Garden Centre.
One shares was issued to the seller of the nursery business.
Money has been put into the Co by the seller and he has treated this as a loan (directors loan) to the company. The full proceeds from sale are expected to be used.
The money has been used to land, purchase plants and other equipment for the garden centre business.
Please can you tell me how I stand in terms of rollover relief -- particularly given the money is going into the company via a loan account.
My accountant has suggested that the conversion of the loan ac into shares in the Co may be the best way forward in this case.
Answer:
Based on the information in your question, it will be difficult to claim rollover relief on the disposal of the land. The first problem is the time limit for reinvestment.
As a general rule, the new asset must be acquired, or an unconditional contract for the acquisition must be entered into in the period beginning 12 months before or ending three years after the date of disposal of the old asset.
In your case the acquisition was made in excess of twelve months before the disposal of the land. You would therefore need to seek an extension of the time limit from the Revenue.
The Revenue will extend the time limit where you can demonstrate that you: (1) had a firm intention to acquire replacement assets within the time limit but you were prevented by some fact or circumstance beyond your control from acquiring the replacement assets, or any assets, within the time limit, and (2) acted as soon as you reasonably could after ceasing to be so prevented.
The Revenue state that examples of circumstances outside a claimant's control might include death or serious illness of a vital party at a crucial time, unsettled disputes or litigation, genuine difficulty in establishing good title or in finding suitable replacement assets or delay in receipt of disposal consideration.
A change of intention at a late stage or a shortage of funds arising out of application of disposal consideration would not normally qualify. As a matter of practice the Revenue will however allow an extension where the new asset was acquired not more than three years before or six years after the disposal of the old asset and there are acceptable reasons for the delay.
Acceptable reasons might include:
Therefore you would firstly need to ascertain whether the time limit could be extended.
Secondly there is the fact that the disposal was by an individual and used in his trade , yet the reinvestment was for the purpose of a family company.
Note that the funds credited go the loan account, and presumably used to purchase assets by the company would undoubtedly not qualify for rollover relief.
There are provisions that allow investments in assets used by a personal trading company to qualify for rollover relief, however the tax legislation states that the gain may be rolled over into the cost of new qualifying assets where:
and
and
The problem in this case is that the original land (ie the old asset) was not used for the purpose of a trade carried out by the personal company, although the new asset may well be.
Therefore in no rollover relief may be available on the reinvestment into the land purchased via the company.
This is supported by the Revenue who have stated that ...'A gain on disposal of a qualifying asset used in a qualifying activity carried on by the claimant may not be rolled over into the cost of acquisition of a qualifying asset which is taken into use for the purposes of a qualifying activity carried on by the claimant's family/personal company...'
It's difficult to see how a conversion of the loan account into share capital would assist in a rollover relief claim. You could try and argue for a deferral under the EIS scheme however it was my understanding that the subscription price must be paid wholly in cash, and as such the conversion of a loan account could prevent relief.
About the Author
The Author of this article/answer is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.
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