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HMRC internal manual

Oil Taxation Manual

Capital gains: Extension of ring fence: reinvestment after pre trading disposal

A disposal and acquisition qualifies for relief if it meets the following conditions:

  • the company making the disposal carries on exploration and appraisal (E&A) activities and has not started a ring fence trade at the time of the disposal (an ‘E&A company’);
  • the disposal is:

    • a disposal of assets which are within the classes of assets listed in section 155 (CG60410 & CG60950+) and which are used by the company only for E&A activities (relevant E&A assets); and either
    • a disposal of a UK licence which relates to an undeveloped area; or
    • a disposal of an asset used in an area covered by a licence under Part 1 of the Petroleum Act 1998 or the Petroleum (Production) Act (Northern Ireland) 1964 which authorises the company to undertake E&A activities;
  • the company reinvests the proceeds in either:

    • E&A expenditure at a time when the company is an E&A company; or
    • oil assets used only for the company’s ring fence trade.

E&A expenditure is expenditure that generally accepted accounting practice would recognise as incurred for the purposes of oil and gas E&A activities. This includes the acquisition of relevant E&A assets, for example a UK licence which relates to an undeveloped area.

Oil assets are defined at S198E and include - exploration, appraisal and development expenditure as provided in S198I (OT30475). The company’s ring fence trade does not need to have commenced prior to the acquisition of the oil assets, that is, the acquisition of a producing asset by a pre-trading company would qualify as it would trigger the commencement of a ring fence trade.