Capital Allowances Act 2001 section 325

Balancing allowances restricted where sale subject to subordinate interest

Section 325 restricts balancing allowances where the relevant interest in a building is sold subject to a subordinate interest (such as a lease) and either the parties are connected or the main purpose of the arrangements is to obtain a tax allowance.

• Where a building's relevant interest is sold subject to a subordinate interest, a balancing allowance that would otherwise arise may be restricted if at least two of the three parties involved (the seller, the buyer, and the tenant holding the subordinate interest) are connected persons, or if the main benefit of the transaction is obtaining a capital allowance.
• The restriction works by increasing the sale proceeds used in the balancing adjustment — adding back any premium received for granting the subordinate interest and, if no commercial rent is being paid, adding the amount by which the proceeds would have been higher had a commercial rent been payable and the property sold on the open market.
• The increase in proceeds is capped at the level that eliminates the balancing allowance entirely — it cannot go further and create a balancing charge.
• Despite the restriction or denial of the balancing allowance, the residue of qualifying expenditure carried forward after the sale is calculated as though the full balancing allowance had been given, so the buyer is not disadvantaged.