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HMRC internal manual

Capital Allowances Manual

IBA: balancing adjustments: anti-avoidance

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/S325 - S326

A person may try to create a balancing allowance by reducing the value of the relevant interest, for example by granting a long lease out of it for a large premium and at a low rent, and then selling the relevant interest when its value has been reduced. There is legislation to prevent this happening.

The legislation applies where:

the relevant interest in a building is transferred subject to a subordinate interest;

and

the transfer gives rise to a balancing allowance; and either:

  • any two of

    • the former owner (the person to whom the balancing allowance would be made),
    • the person who acquires the relevant interest and
    • the person who acquires the subordinate interest are connected, or

      • it appears that the sole or main benefit was obtaining an IBA.

     

    This is the sort of situation that the legislation is designed to catch. Jake and Elwood are brothers. Elwood owns the freehold of an industrial building. He grants a long lease of the building for a large premium and a nominal rent. This reduces the value of the freehold interest. He then transfers the freehold to Jake when its value is low and claims a balancing allowance.

    Where the legislation applies, the transfer proceeds are increased by the amount of any premium received. If no rent is payable or the rent payable is less than the commercial rent the transfer proceeds are increased by the amount they would have been increased by if a commercial rent had been payable and the relevant interest had been sold in the open market.

    There is a limit on the amount by which the transfer proceeds can be increased. They cannot be increased to more than the amount which prevents a balancing allowance being made. This increase of proceeds only affects the former owner. The person to whom the relevant interest is transferred has the residue of qualifying expenditure after transfer and so the IBAs are calculated as if the balancing allowance had been made.

    In the example above, Elwood’s transfer proceeds are increased by the amount of the premium he received to reduce or prevent his balancing allowance but the residue of qualifying expenditure after sale, and so Jake’s IBAs, are calculated as if the balancing allowance had been made.

    The terms on which the subordinate interest was granted may be varied before the relevant interest is transferred. If they are any capital consideration paid for the variation is treated as a premium for the grant of the subordinate interest and it is the rent payable immediately before the transfer of the relevant interest which is taken into consideration.