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HMRC internal manual

Capital Allowances Manual

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HM Revenue & Customs
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Assured Tenancy Allowances: Calculation of balancing adjustment

CAA01/S516 - S523

If the dwelling house has been a qualifying dwelling house for the relevant period of ownership (see below) compare the proceeds from the balancing event with the residue of qualifying expenditure attributable to the dwelling house immediately before the balancing event. If the residue is more than the proceeds the difference is a balancing allowance. If the residue is less the difference is a balancing charge.

If there have been periods during the relevant period of ownership when the dwelling house was not a qualifying dwelling house the position is as follows.

There is a balancing charge if the proceeds from the balancing event equal or exceed the qualifying expenditure attributable to the dwelling house (or the residue after the last sale as the case may be).

If the proceeds from the balancing event are less than the qualifying expenditure attributable to the dwelling house (or the residue after the last sale as the case may be) calculate the adjusted net cost. This is the depreciation suffered while the building has been a qualifying dwelling house. This is how you should do the calculation.

First you should calculate the relevant period of ownership. It is the period that begins with:

  • the day on which the dwelling house was first used, or
  • the day after the most recent sale of the dwelling house,

 

and ends with the day on which the balancing event occurs.

Then you should calculate the adjusted net cost. Start with the qualifying expenditure attributable to the dwelling house or the residue after the last sale, as the case may be, and deduct the proceeds from that. Then multiply that amount by the number of days in the relevant period of ownership when the dwelling house was a qualifying dwelling house and then divide by the number of days in the relevant period of ownership. The result is the adjusted net cost.

Example A dwelling house cost £30,000 to buy unused in 1985. It was brought into use on 1 January 1986 but it only became a qualifying dwelling house on 1 January 1988. It was a qualifying dwelling house until it was sold, for £6,000, on 31 December 2001, that is for 14 years out of the 16 years of ownership. The adjusted net cost is (£30,000 – £6,000) = £24,000 x 14/16 = £21,000.

Once you have calculated the adjusted net cost compare it with the allowances made. The allowances made are writing down allowances and any initial allowance made.

There is a balancing adjustment equal to any difference between the adjusted net cost and the allowances made. The adjustment is a balancing allowance if the adjusted net cost exceeds the allowances made. Otherwise the adjustment is a balancing charge.

The legislation in CAA01/S570A applies to prevent the making of a balancing allowance when the proceeds of the balancing event are affected by a tax avoidance scheme CA17000.