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Tribunal underscores roll-over relief issue

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24th Feb 2012
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A recent tax tribunal involving a model-kit business that wanted to claim roll-over relief for a house, farm buildings and 16 acres of fields underscores the importance of showing that assets are used for business purposes, Smith & Williamson has said.

In the first-tier tribunal case (Pems Butler Ltd v HMRC TC01769, decision announced in January), Mr and Mrs Butler, the directors of the PEMS Butler which sells kits for model buildings, had claimed roll-over relief for assets only partially replaced.

The claim was made after the purchase price of Red House - a house, farm buildings and 16 acres of fields. The house was valued at £270,000.

The business, which sells kits for model buildings, claimed rollover relief (under s153 of the Taxation of the Chargeable Gains Act 1992). Roll-over relief applies to the relevant classes of asset, including building or land “occupied (as well as used) only for the purposes of the trade”.

After checking the claim, however, HM Revenue and Customs (HMRC) adjusted the tax relief to only allow 5% of the acquisition consideration as reinvestment of the gain on the sale of the previous property.

Roll-over relief  lets business owners or traders defer capital gains tax (CGT) due when disposing of old business assets. When new assets are bought costing the same as, or more than money raised from the sale of old assets, roll-over relief allows the business to postpone paying CGT until it disposes of the new assets.

The Red House property was occupied by the company’s directors. Although the first-tier tribunal found that the house was used for trade because it was used by the company to provide the directors with consideration for their work, it concluded that it was being occupied by the directors rather than the company.

Their occupation was neither essential to the performance of their duties or to better perform their duties, the tribunal found. Roll-over relief was, therefore, only available to those parts of the Red House and outbuildings used and occupied for the purposes of the trade.

The tribunal decided that only 10% of the house was used for business. It said that roll-over relief could apply to £67,000 of the amount paid for Red House - around a quarter of its value.

Richard Mannion, national tax director,at Smith & Williamson, said the case was a reminder on the importance of proving to the taxman that assets are occupied and used for business when claiming rollover relief.

For assets only partly used for business, claimants will need to provide evidence of how much of the asset is used for business. HMRC requires a “just and reasonable apportionment” of assets.

Calculating the apportionment of a mixed-used building would involve commissioning a report from an independent surveyor, which can be included in submissions to the taxman, Mannion said.

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