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HMRC internal manual

Capital Allowances Manual

IBA: relevant interest: election to treat grant of long lease as a sale of the relevant interest

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/S290 - S291

Normally the grant of a lease out of the relevant interest has no effect for IBA purposes. The person who holds the relevant interest continues to be entitled to IBA.

There is one exception to this. The relevant interest may be a lease The premium paid by the lessee for the grant of the lease is treated as the sale / purchase price. A balancing adjustment will be made on the lessor and the lessee will be entitled to IBA. You should exclude the part of the premium that relates to the land on which the building stands in the normal way.

A long lease is a lease that lasts more than 50 years. There are rules similar to the Property Income rules for establishing the length of a lease. Broadly, a lease is treated as being shorter than the term specified in the lease agreement if it looks unlikely that it will last that long. Conversely, a lease is treated as being longer than the term specified if the lessee might become entitled to a further lease when the original lease ends. In that case the original lease is treated as continuing until the further lease ends.

The election covers all the construction expenditure and all the buildings for which the interest out of which the lease is granted is the relevant interest.

If you get a late election you should refuse it. There is nothing in the legislation that gives HMRC authority to admit a late election. There is one exception to this. You may accept a late election if:

  • there is a clear in-date indication in the papers or in the correspondence that an election will be made, or
  • everyone concerned has submitted claims, computations etc. on the basis that an election has been or will be made.


Example Warren builds a factory on land that he owns for use in his manufacturing trade. 2 years later he builds an extension. The freehold interest is the relevant interest for both the factory and the extension. 3 years after that Warren grants a 999-year lease of the factory to Jackson and Warren and Jackson make a joint election to treat that grant of a long lease as the sale of the relevant interest. The election applies to both the factory and the extension. It is not possible for Warren and Jackson to make an election for the extension only.

The election is made by written notice to HMRC and must be made within 2 years of the date on which the lease takes effect. An election cannot be made until some construction expenditure has been incurred on the building.

An election may not be made if:

  • the lessor and lessee are connected unless the lessor is a body discharging statutory functions and the lessee a company that it controls. For example, a local authority may grant a long lease of a building that it has built to a company that runs its refuse services. The local authority and the company may make an election to have the grant of the long lease treated as a sale of the relevant interest even though the local authority and the company are connected.
  • it appears that the sole or main benefit expected to be gained from the granting of the lease and the making of the election is the obtaining of a balancing allowance.