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1.I did not understand the concept of roll over relief. why this stupid relief is deducted from new asset? is roll over relief beneficial ,i mean what is its use in this chapter?
2”in replacement of new depreciating asset, gain can not be rolled over” . what does this rolled over mean in this statement?
Instead it is deferred until the earliest of following three events
1.disposal of replacement of asset
2 the depreciating asset ceases to be used for the purpose of trade
3 ten years from the date of acquisition of the replacement asset.please explain me what these above conditions mean?
My understanding about roll over relief is that when you dispose a business asset, you have an income from it. If you have an income, you need to pay tax on it. However, if you buy a new asset for the same trade purposes, then this relief actually “identifies” the connection between the two transaction and in this way you postpone the tax payment till the disposal of the second (replacement) asset.
Assets which you can apply roll over relief are the followings:
– land and building
– fixed plant and machinery
– goodwill
– ships, air-, hover-, spacecrafts, satellitesIn case of disposing any other assets (these are probably referred in your notes as depreciating assets) you cannot claim roll over relief – even if you buy a replacement. So if you have gain on the disposal then a tax is payable on it and the date when the gain is earned is the earliest from those 3 that you listed above.
I hope it makes sense in this way.
hey thank u so much .. 🙂 why we deduct ROR from new asset’s acquisition cost?
Ok, let’s say you buy an asset without any relief, any connections, etc. Just a simple acquisition. When you sell this asset, you pay tax after the “selling price – buying price”.
When you have a roll over relief, we said, that you actually “postpone” the tax payment which would be due on the disposal. So, when and how would you pay the tax then? If we apply the calculation “selling price – buying price” on the replacement asset, it means, when you sell the replacement asset, you would walk away without paying the tax on the gain which comes from the disposal of the first asset. In order to not to be able to do that, you deduct the amount of the relief from the cost of the second asset. Which basically means, that it will be added to your gain and at that point you will pay the tax after both the first and the second disposal.
I hope it makes sense in this way but let me know if not, and I try to explain it differently. 😉
One additional thing about the assets, which the roll over relief applies to (I just read about it yesterday):
as you said, it doesn’t apply to “depreciating assets”. Depreciating asset means an asset with an expected life of 60 years or less at the time of acquisition. This can be for example leasehold land and buildings or fixed plant and machinery, too.
So be careful with the identification of the asset.
If it’s a depreciating asset, the date of the gain when it’s earned is one of those 3 options that you listed in your first comment and this is called to hold-over relief.
R/O relief is chargeable gain that is deferred to when you dispose your second asset.
you buy a house for £5 and sell for £7, chargeable gain is £2.
if you buy another house for £8 for the same purpose and the chargeable gain for the first house £2 will be deferred, the deemed cost for the second house will be £6 (8-2), when you dispose your second house for £15, the chargeable gain £9 (15-6) includes £7 (15-8) which is the real gain from the second house and another £2 from the first house.
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