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HMRC internal manual

International Manual

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HM Revenue & Customs
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Foreign Permanent Establishments of UK Companies: chargeable gains: relief for replacement of business assets

Roll over relief

Where the consideration received for the disposal of a business asset is applied in acquiring replacement business assets any gain may be deferred if a claim is made (see CG60250+). If the whole amount received is applied in acquiring replacement business assets a claim may be made under TCGA92/S152 and the consideration for the disposal of the old asset is reduced to an amount that ensures that neither a gain nor a loss arises, the cost of the new assets being reduced by a similar amount. If only part of the consideration is applied in acquiring new business assets a claim may be made under TCGA92/S153 and a reduction is made in the gain on the old asset with a similar reduction in the cost of the new assets. If the replacement asset is a wasting asset a claim may be made under TCGA92/S154 and the gain on the old asset is held over until the occasion of the first of certain events (CG60360).

Where the first business asset has been used in a permanent establishment and a claim is made under TCGA92/S152 or S153, the computation of the amount of the deferred gain will take the PE use into account. TCGA92/S276A TCGA (see INTM282060) requires that for the purpose of S152 the consideration which would secure that neither a gain or loss would accrue to the company on the disposal includes the amount that would be the foreign permanent establishments amount attributable to the disposal. (See example 1 below.) No equivalent deeming rule is needed for S153, because there is only partial relief and so a chargeable gain will remain on the old asset, in relation to which an exemption adjustment is computed in the usual way. (See examples 2 and 3 below). Where the claim is under S154 an exemption adjustment will be made to the appropriate extent when the held over gain is deemed to accrue.

Where the second business asset has been used in a PE but the first has not, the effect of a claim under S152 will be to reduce the base cost of the second asset. The exemption adjustment on the disposal of the second asset should take account of this reduction. (See example 4 below).

Example 1: Roll-over relief (ignoring indexation) - no gain / no loss computation

A company disposes of an asset for consideration of £260. The asset cost £60 and 40% of the asset was used for the purpose of a PE throughout the period of ownership.

The consideration of £260 is applied in acquiring replacement assets with a total cost of £300 and a claim is made under TCGA/S152.

The consideration for the first asset is reduced to such an amount as would give rise to neither a gain nor a loss after making an exemption adjustment.. The gain is £200 (£260 less £60).

The exemption adjustment is £80 (40% of £200).

Therefore the consideration for the disposal of the old asset is reduced to £140 (£60 plus £80), which is the amount that will give rise to neither a gain nor a loss on the old asset after making the exemption adjustment.

The consideration for the new assets is reduced by £120 (£260 less £140) to £180 (£300 less £120).

Example 2 - Roll-over relief partial re-investment (ignoring indexation) - Amount not reinvested is less than exemption adjustment

A company disposes of an asset for consideration of £260. The asset cost £60 and 40% of the asset was used for the purpose of a PE throughout the period of ownership.

£200 of the consideration is applied in acquiring replacement assets with a total cost of £200.

The gain on the first asset is £200 (£260 less £60).

The exemption adjustment is £80 (40% of £200).

The chargeable gain on the first asset is £120 (£200 - 80).

The proceeds from the sale of the first asset not reinvested are £60 (£260 - £200). The part of the consideration that is not applied in acquiring replacement assets (£60) is less than the amount of the gain (£200). Therefore a claim can be made under S153.

The amount of the gain is reduced to the amount of the consideration not applied (£200 reduced to £60). The amount of the chargeable gain is proportionately reduced (i.e. by 70% from £120 to £36). The gain immediately chargeable will be £36.

The consideration for the new asset is reduced by the amount of the reduction in the chargeable gain £84 (£120 less £36) to £116 ((£200 less £84).

If the new asset is later sold for £300 and has not been used in a PE the chargeable gain will be £184 (£300 less £116).

Overall the company has made gains of £300 (£200 on the 1st asset and £100 on the 2nd asset) and chargeable gains of £220 (£36 plus £184). So the ‘relevant profits amount’ of £80 is not charged to corporation tax.

Example 3 - Roll-over relief partial re-investment (ignoring indexation) - Amount not reinvested is greater than exemption adjustment

A company disposes of an asset for consideration of £260. The asset cost £60 and 40% of the asset was used for the purpose of a PE throughout the period of ownership.

£150 of the consideration is applied in acquiring replacement assets with a total cost of £150.

The gain on the first asset is £200 (£260 less £60).

The exemption adjustment is £80 (40% of £200)

The chargeable gain on the first asset is £120 (£200 - £80)

The proceeds from the sale of the first asset not reinvested are £110 (£260 - £150). This is less than the amount of the gain (£200) and so a claim can be made under S153.

The amount of the gain is reduced to the amount of the consideration not applied (£200 reduced to £110). The amount of the chargeable gain is proportionately reduced (i.e. by 45% from £120 to £66). The gain immediately chargeable will be £66.

The consideration for the new assets is reduced by the amount of the reduction in the chargeable gain £54 (£120 less £66) to £96 (£150 less £54).

If the new asset is later sold for £240 and has not been used in a PE the chargeable gain will be £144 (£240 less £96).

Overall the company has made gains of £290 (£200 on the 1st asset and £90 on the 2nd asset) and chargeable gains of £210 (£66 plus £144). So the ‘relevant profits amount’ of £80 is not charged to corporation tax.

Example 4 Roll-over relief (ignoring indexation) - gain rolled over into asset used in a PE:

A company disposes of a business asset for consideration of £200, realising a gain of £50. That asset has not been used for a PE. The consideration is applied in acquiring a new business asset that will be used by the company in a PE. The cost of the new asset is £220. A claim is made under TCGA/S152 and the cost of the new asset is reduced to £170 (£220 less £50). Some time later the new asset is disposed of for £300, realising a gain of £130 (£300 less £170). The exemption adjustment is £80, which represents the gain made on the new asset (£300 less £220) and that which would be taxable in the other State in accordance with the relevant tax treaty. There is a net chargeable gain of £50, which recovers the rolled over gain on the first asset.