597 Replacement of business and other assets

Summary

This section enables a person carrying on a trade to defer capital gains on the disposal, before 4 December 2002, of certain business assets, where the proceeds are reinvested in acquiring new assets for use exclusively in the trade. Both the asset disposed of (the “old asset”) and the new asset must be within one (not necessarily the same one) of the following categories —

• plant or machinery used only for the purposes of the trade,
• land and buildings occupied and used only for the purposes of the trade,
• goodwill, and
• financial assets of certain sporting bodies.

The relief operates on the basis that the capital gain on the disposal of the old asset is “rolled over”, that is, it is deemed not to arise until the new asset ceases to be used in the person’s trade. Moreover, the gain, subject to the same conditions being satisfied, continues to be “rolled over” where the new asset ceases to be so used and the proceeds from that disposal are reinvested in a further new asset and so on. However, while gains arising on disposals before 4 December 2002 may be “rolled over”, and continue to be “rolled over” while the person continues to invest in new assets, this entitlement will not apply to any gains arising on disposals on or after that date. However, provision is made to allow relief where a new asset is acquired before 4 December 2002 but the related old asset has not been disposed of before that date.

In calculating the tax on the deferred gain, the date of disposal of the old asset is the appropriate date for the purposes of determining indexation relief.

The investment in the new asset must be made within the period starting 1 year before the date of the disposal of the old asset and ending 3 years after that date. The relief must be claimed – it does not apply automatically.

A full deferral of the gain on the old asset is available only where the entire consideration for the disposal of the old asset is reinvested. If only part of that consideration is reinvested, a deferral is allowed up to the amount by which the gain exceeds the amount not reinvested. If the amount not reinvested exceeds the gain, no deferral is allowed.

In addition to trades, the relief also applies in the case of public authorities, the occupation of woodlands on a commercial basis, professions, offices and employments, trade protection associations, non-profit making bodies, amateur sports bodies and farming.

Subject to certain exceptions, the relief does not apply in the case of disposals of development land (see section 652).

Details

Definitions

(1) The terms “farming”, “trade”, “profession”, “office” and employment” have the same meanings respectively as in the Income Tax Acts. This, however, does not entail the application of the provisions of those Acts regarding the circumstances in which a person is treated as having commenced or ceased to trade.

A “trade of dealing in or developing land” includes a business of dealing in or developing land treated as a trade under the Income Tax Acts.

Application to non-trading activities

(2) The section is essentially cast in the context of persons who are trading but it also applies, subject to the same rules, to —

• the discharge of the functions of a public authority,
• the occupation of woodlands managed by the occupier on a commercial basis with a view to realising profits,
• professions, offices and employments,
• the activities of a non-profit making body which are wholly or mainly directed to the protection or promotion of the interests of its members in the carrying on of their trade or profession,
• the activities of a non-profit making body whose activities are wholly or mainly carried on otherwise than for profit (in the case of land and buildings, the relief applies only where they are both occupied and used by the body and, in the case of other assets, only where they are used by the body),
• the activities of a body established for the sole purpose of promoting athletic or amateur games as are directed to that purpose,
• farming.

Qualifying assets

(3) The assets which qualify for the relief are plant or machinery, land and buildings, goodwill and financial assets of bodies established for the sole purpose of promoting athletic or amateur games or sports. Land and buildings must be occupied (as well as used) only for the purposes of the trade. Where land is the stock in trade of a dealer in or developer of land, it does not qualify for the relief.

Full consideration for disposal reinvested

(4)(a) Where —

• a trader disposes, before 4 December 2002, of assets (the old assets) used only for trade purposes throughout the period of ownership and applies the consideration in acquiring other assets (the new assets),
• the new assets are taken into use for trade purposes on their acquisition and are used only for those purposes, and
• the old assets and the new assets are qualifying assets (subsection (3)), namely, plant or machinery, land and buildings or goodwill,

the chargeable gain on the disposal of the old assets, on the due claim being made, is treated as if it did not arise until the trader ceases to use the new asset for trade purposes. The term “ceases to use” includes a disposal of any kind (for example, a sale or a gift, and also a cessation on death).

(4)(b) Where, however, the new assets cease to be used for trade purposes but the consideration for the disposal of those new assets is applied in acquiring other new assets taken into use in the trade and used only for trade purposes, the gain on the disposal of the old assets is deferred further until the other new assets (and any further new assets similarly acquired) cease to be used for trade purposes.

[However, if a person has acquired new assets for the purpose of their trade (or any other activity of the person as referred to in subsection (2)) before 4 December 2002, with the intention of disposing of the related old assets, but has not done so before 4 December 2002, they may still be eligible to avail of the relief if they dispose of the old assets on or before 31 December 2003 (section 67(2)(a) of the Finance Act 2003). In this situation any gain arising on such a disposal may be treated as if it did not arise until those new assets cease to be used for the purposes of the person’s trade or that other activity of the person (as referred to in subsection (2)).]

Part only of consideration reinvested

(5) Where only part of the consideration for the disposal, before 4 December 2002, of the old assets is reinvested in acquiring new assets, the relief under subsection (4) does not apply. However, where the amount not reinvested is less than the gain on the disposal of the old assets, that gain is deferred to the extent that it exceeds the amount not reinvested. The relief under this subsection must be claimed – it does not apply automatically.

[If a person acquired new assets before 4 December 2002 but had not disposed of the related old assets before that date, relief may still be available under this subsection if the disposal is made on or before 31 December 2003, and the acquisition cost of the new assets is less than the disposal proceeds of the old assets.]

No indexation relief for period for which gain is deferred

(6) Where a gain or part of a gain is treated as deferred under subsection (4) or (5), it will not be so treated for the purposes of indexation relief under section 556. In other words, the deferral of the gain does not qualify the owner for indexation based on a period of ownership longer than that during which the person in fact owned the old assets on the disposal of which the original chargeable gain arose.

Time limit for reinvestment

(7) The relief applies only if the acquisition of the new assets takes place, or an unconditional contract for the acquisition of the new assets is entered into, in the period beginning 1 year before and ending 3 years after the disposal of the old assets. This time limit may be extended by the Revenue Commissioners. Where an unconditional contract is entered into within the time limit, the relief may be given provisionally and all necessary adjustments are to be made by way of making assessments (and without regard to the general time limits for making assessments) or repayments (notwithstanding the general time limit for making a claim for a repayment of tax in section 865) or discharge of tax when all the facts as to the acquisition of the new assets are known.

Acquisition of new assets must be for trade purposes

(8) The relief does not apply unless the new assets are acquired for trade purposes and not wholly or partly for the purpose of resale at a profit.

Part only of a building or structure used for trade purposes

(9) Where only part of a building or structure has been used for trade purposes, that part and any land occupied for purposes ancillary to the occupation and use of that part is to be treated as a separate asset, and consideration for an acquisition or disposal is to be apportioned accordingly.

Old assets used partly for non-trade purposes

(10) Where the old assets were used for trade purposes during part only of the period of ownership, the acquisition cost and disposal proceeds are to be apportioned as if there were 2 separate assets. The apportionment is to be made on the basis of the time and extent to which the old assets were and were not so used, and the relief applies only to the proportion of the gain attributed to the asset used for trade purposes.

Person carrying on 2 or more trades

(11)(a) The relief applies to a person who carries on 2 or more trades which are in different localities but which are concerned wholly or mainly with goods or services of the same kind. The relief applies as if the 2 or more trades were a single trade; thus, the disposal of old assets may be made in one trade and the acquisition of new assets in another trade.

Cessation of trade and commencement of new trade

(11)(b) The relief also applies to a person who ceases to carry on a trade which the person had carried on for at least 10 years and who within 2 years of the date of cessation of that trade commences to carry on a new trade. In such a case the old trade and the new trade are treated as the same trade in relation to the disposal of old assets and the acquisition of new assets.

Apportionment

(12) Where consideration for a disposal or an acquisition relates to assets some of which are and others are not the subject of a claim for relief, the consideration is to be apportioned between the assets in such manner as is just and reasonable.

Relevant Date: Finance Act 2021