Selling a property which is not your main residence can result in a Capital Gains Tax (CGT) bill. In fact given the way prices are going it almost always will produce a tax bill.
Here’s one of the questions I am asked most. “If I sell a rental property (or holiday home) but use the money to buy another is it true that I won’t have to pay tax?”
The answer is NO. Simply by reinvesting the proceeds in a similar venture will not make a penny difference to the tax bill.
There is obviously someone out there touring pubs and coffee shops dispensing free tax advice. They seem to tell people that there is no tax if the money is spent on a new rental property or holiday home. I end up confirming that they are wrong. I wish they would just stay home and keep their tax thoughts to themselves.
I know where the confusion may arise. There is a relief which can put off tax bills due to reinvesting in similar assets. The key thing is that both sale and purchase have to be of business assets.
If you have sold business assets and made a capital gain then you can choose to avoid paying the CGT by purchasing new business assets and making a claim for what is called ‘Business Asset Rollover Relief.
This can be useful if you sell a business, or perhaps some premises used for the business. The definitions of business asset include land and buildings used for a trade, goodwill and things like milk quotas.
To benefit from the relief you must reinvest the sale proceeds in new business assets. They do not have to be used in the same trade. For example you could sell your sweet shop and use the money to buy a farm, or an engineering business.
There is a time limit for buying the new assets. It forms an unusual 4-year window for the purchase. The window opens 1 year before your asset sale and closes 3 years afterwards. You may wonder how you could reinvest proceeds before you make the sale. Good point. The time limit allows this so that you can buy your replacement asset in anticipation of the sale of the old asset going though.
For example a farmer might know he is selling his home farm in Northern Ireland. But before the sale he might find a farm in Scotland that he fancies. So long as the Scottish farm is bought less than a year before the home farm is sold, then the reinvestment rules have been met.
The way the relief works is this. The disposal of the old asset is treated as if it is made on a no gain / no loss basis. This means that the gain that might otherwise have been made has been deducted.
That same amount of gain is called the ‘gain rolled-over’. The price treated as paid for the new asset is reduced by the same amount. In effect this means that the tax bill is put off until the new asset is sold.
Simplified example: Sell a factory which cost £100,000 for £250,000. Gain is £150,000. Rollover claimed for purchase of a farm for £350,000.
Gain rolled-over is £150,000. So the cost of the farm is treated as £350,000 less £150,000 = £200,000.
If the farm is later sold for £475,000 then a gain of £275,000 has been made.
With business assets facing a worst case CGT bill of 28% sometimes it may be better to pay the tax than roll over the gain. If you roll it over then in years to come when you pay the tax it may be more than 28%. For example it could rise to be tax like income tax rates – 40% or 50%