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HMRC internal manual

Capital Allowances Manual

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HM Revenue & Customs
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ABA: the relevant interest

Agricultural buildings allowance was phased out by FA2008.

A person gets

  • 75% of the allowance for the financial year beginning 1 April 2008 / tax year 2008/09
  • 50% of the allowance for the financial year beginning 1 April 2009 / tax year 2009/10
  • 25% of the allowance for the financial year beginning 1 April 2010 / tax year 2010/11

There is no ABA for the financial year beginning 1 April 2011 / tax year 2011/12 onwards.

CAA01/S364 - S367

The relevant interest in relation to an agricultural building is the interest in the related agricultural land that the person who incurred the construction expenditure was entitled to when the construction expenditure was incurred.

The interests that can be the relevant interest are:

  • the freehold interest in
  • an agreement to acquire the freehold interest in
  • their Scottish equivalents
  • a lease of, or
  • an agreement to acquire a lease of

the related agricultural land.

Example In the example in CA40300 where Maggie owns a farm and builds a barn the relevant interest in relation to the barn is her freehold interest in the farmland.

An agreement to acquire a lease is only the relevant interest where the term of the lease has started.

Once the person who has an agreement to acquire the freehold acquires the freehold, the freehold becomes the relevant interest.

An interest such as a licence, grazing or commons rights, rent of grass keep etc., cannot be a relevant interest.

If the person who incurs the construction expenditure has more than one interest in the related agricultural land, the relevant interest is the one that is reversionary on the others.

Example Charles is a farmer who owns his farm. He gives up farming and grants a long lease of the farm to Frank. Charles decides to go back into farming and rents the farm back from Frank. When that happens Charles has both the freehold interest and a leasehold interest in the farm. If Charles then builds a milking parlour on the farm the relevant interest in the milking parlour is the freehold interest in the farmland and not his leasehold interest.

The person who has the relevant interest may grant a lease of the land. The grant of the lease has no effect on the relevant interest, which stays as it was before the grant of the lease. The person to whom the lease is granted does not acquire the relevant interest. In the example above Charles keeps the relevant interest in any agricultural buildings he has constructed when he grants the lease to Frank.

A farmer who builds an agricultural building may use the related agricultural land as security for a loan, for example by mortgaging the farm. If the farmer does that, the title to the land will be transferred to the person who made the loan but the relevant interest in relation to the agricultural building will stay with the farmer. You should only see a case like that if the farmland is in Ireland.

Example In the example above Charles mortgages his farm with the Manhattan Bank to get money to expand his business. Charles keeps the relevant interest in the agricultural buildings on his farm once it has been mortgaged. It is not transferred to Manhattan Bank although it holds the title deeds as security for the mortgage.

If the relevant interest is a lease there are various ways in which it may come to an end. The lease may end, it may be merged with the superior interest, it may be surrendered or it may be sold. These are the rules:

  • If a lease that is the relevant interest is surrendered, the interest into which the lease is merged becomes the relevant interest. If the person who owns the interest into which the lease is merged is not the person who owned the lease, the person who owns the interest into which the lease is merged is treated as acquiring the relevant interest.
  • If the person who holds the lease that is the relevant interest acquires the reversionary interest, the reversionary interest, that is the interest into which the lease is merged, becomes the relevant interest.
  • If a lease that is the relevant interest terminates and a new lease of all or part of the related agricultural land is granted to the same lessee, the new lease is the same relevant interest as the old one.
  • If a lease that is the relevant interest terminates and a new lease of all or part of the related agricultural land is granted to a different lessee who pays the former lessee for assets qualifying for ABA, the new lessee is treated as acquiring the relevant interest.
  • In any other case, the lessor’s interest becomes the relevant interest.

The rules apply even if the new lease does not cover precisely the same land and buildings as the old lease. The ending of a lease is not an event for which a balancing event election may be made and so there is never a balancing adjustment when a lease ends.

The example below shows how the rules work.

Example Eric owns a dairy farm. He grants a 20-year lease of the farm to Gordon. Gordon builds a cowshed on the farm. The relevant interest in relation to the cowshed is Gordon’s lease of the farm.

If Gordon gets bored with farming after 5 years and surrenders his lease of the farm, the lease is merged into Eric’s freehold interest. When this happens Eric’s freehold interest becomes the relevant interest in relation to the cowshed and Eric can claim ABA on the cowshed.

If Gordon buys the freehold interest from Eric the freehold interest becomes the relevant interest in relation to the cowshed and Gordon can keep on claiming ABA.

After 20 years Gordon’s lease ends. If Eric grants Gordon a new lease of the farm, Gordon’s new lease becomes the relevant interest in relation to the cowshed and Gordon can keep on claiming ABA on the cowshed.

When Gordon’s lease ends, Eric grants a lease of the farm to Jack and Jack pays Gordon for the cowshed. Jack is treated as acquiring the relevant interest in relation to the cowshed and so Jack can claim ABA on the cowshed.

If Gordon’s lease ends but Eric does not grant a new lease to anyone, Eric’s freehold interest becomes the relevant interest and Eric can claim ABA on the cowshed.