How does rollover relief affect the cost of a new asset?

In the context of rollover relief, when a business disposes of an asset and reinvests the proceeds in a new asset, rollover relief allows for the deferral of any capital gains tax that would typically arise from the disposal. The gain that is rolled over is effectively deducted from the cost of the new asset.

Therefore, when considering how rollover relief affects the cost of a new asset, it is correct to state that it sets the rollover gain against the cost of the new asset. This means that the amount of gain that was not taxed is subtracted from the purchase price (or deemed cost) of the new asset. As a result, this reduces the "deemed cost" of the new asset and postpones the tax liability until a later date, when the new asset may be disposed of. This treatment encourages investment as it alleviates the immediate tax impact of selling an existing asset.

Other options do not accurately describe the function of rollover relief. For example, the notion that it increases the deemed cost does not align with the principle of deferring gains against the new investment's cost. Additionally, the idea that it has no effect on the cost of the new asset overlooks the fundamental mechanics of how rollover relief works, which explicitly reduces the