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HMRC internal manual

Capital Allowances Manual

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HM Revenue & Customs
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IBA: relevant interest: termination of lease

Budget 2007 announced a business tax reform package including the gradual withdrawal of IBAs and ABAs over four years. Legislation was introduced in FA08 to give effect to those changes. The phased withdrawal of IBA writing down allowances had effect for chargeable periods ending on or after 1 April 2008 for businesses within the charge to CT and 6 April 2008 for businesses within the charge to IT. There are no IBA writing down allowances for the financial year beginning on 1 April 2011 and subsequent years.

CAA01/S359

The relevant interest may be a lease. Sometimes there is a balancing event when a lease that is the relevant interest terminates but in other cases there is ‘continuation’ treatment so no balancing adjustment arises. When a lease, which is the relevant interest in a building, terminates the following rules apply:

  • If the lessee remains in possession of the building with the lessor’s consent without a new lease being granted, the lease that has terminated is treated as continuing for as long as the lessee remains in possession. While the lease that has terminated is treated as continuing there is no balancing event.
  • If there was an option, in the lease that has terminated, for the lessee to be granted a new lease and the lessee exercises that option, the new lease is treated as a continuation of the old lease. In that case there is no balancing event.
  • If the lease included a building and the lessor pays a sum to the lessee when the lease terminates in respect of that building, the lease that was terminated is treated as if it had come to an end by the lessee surrendering it in return for the sum that the lessor has paid him. There is a balancing event here.
  • If another lease is granted to a different lessee when the lease terminates and the new lessee pays a sum to the original lessee in connection with the transaction, the two leases are treated as if they were the same lease and as if that lease had been assigned by the old lessee to the new lessee in return for the sum which he received. There is also a balancing event here.