Reinvestment reserve: deferring tax after selling a business asset

How the reserve works

Selling an asset above book value, you may place the book profit in a reinvestment reserve instead of adding it to profit. The condition is an intention, at balance date, to reinvest in another asset. When you then buy something new, you deduct the reserve from its purchase price: the new asset enters the balance sheet lower and you depreciate less. You still pay the tax, but spread over the depreciation years rather than at once.

The rules of the game

The reserve has a few hard conditions:

• Reinvestment intention: you must plausibly show you plan to invest again. Record it with quotations, emails or an investment plan.
• Deadline: reinvestment must happen by the end of the third year after the sale year. Fail and the reserve is released, taxed at once after all.
• Book value floor: the write-down may not push the new asset's book value below that of the asset sold.
• Same-function rule: for assets depreciated over more than ten years, like buildings, the replacement must serve the same economic function. For shorter-lived assets, vans, machines, fixtures, that rule does not apply.

Worked example: van sold, new van bought

This is how it plays out in the most common case:

If the reinvestment falls through

If your plan changes, the tax outcome changes with it. Abandon the intention and the reserve is released in the year that happens. If by the end of the third year after the sale no reinvestment has occurred, release is mandatory, unless the delay is beyond your control in a process already under way. And if you cease your business entirely, the reserve is settled as part of the cessation profit. So actively track the deadline; three years is shorter than it feels.

Frequently asked questions