Capital Allowances Act 2001 section 389

Balancing allowances restricted where sale subject to subordinate interest etc.

Section 389 is an anti-avoidance rule that restricts balancing allowances where a relevant interest in a building is sold subject to a subordinate interest (such as a lease), preventing the artificial creation of balancing allowances through such arrangements.

• Where a relevant interest is sold subject to a subordinate interest and a balancing allowance would otherwise arise, the allowance may be restricted if the parties are connected or the main purpose of the arrangement is to obtain a tax allowance.
• The sale proceeds are increased by any premium received for granting the subordinate interest, and further increased if no commercial rent is payable, to reflect what the proceeds would have been had a market rent applied — but proceeds cannot be increased beyond the point that would trigger a balancing charge.
• If the terms of the subordinate interest were varied before the sale, any capital payment for the variation is treated as a premium for the grant, and the rent payable is assessed based on the terms in force immediately before the sale.
• Where this section reduces or eliminates a balancing allowance, the residue of qualifying expenditure after the sale is still calculated as though the full unrestricted balancing allowance had been given.