What does section 527 of the Capital Allowances Act 2001 do when a balancing allowance arises on the sale of a dwelling-house?

When a balancing allowance arises on the sale of the relevant interest in an assured tenancy dwelling-house, section 527 writes off the excess of the residue of qualifying expenditure over the net sale proceeds at the time of sale. This reduces the residue down to the level of the net proceeds received by the seller.

How does section 527 adjust the residue of qualifying expenditure when a balancing charge is made?

If a balancing charge arises on the sale of the relevant interest, section 527 increases the residue of qualifying expenditure by the amount of that charge at the time of the sale. This reflects that the seller received more than the remaining tax value and ensures the correct starting position passes to the purchaser.

What is the cap on residue where section 517(6) applies under section 527?

Where the balancing charge is calculated under section 517(6) because the dwelling-house was not a qualifying dwelling-house throughout the ownership period, the residue after the sale is capped at the net sale proceeds. This prevents the purchaser from inheriting a residue greater than the price effectively paid for the dwelling-house.

Can you give an example of how section 527 applies on the sale of an assured tenancy dwelling-house?

If qualifying expenditure was £100,000 with allowances of £30,000 given, the residue is £70,000. On a sale for £50,000 net proceeds, a £20,000 balancing allowance arises and is written off, reducing the residue to £50,000. The purchaser inherits that £50,000 residue reflecting the price effectively paid.

Capital Allowances Act 2001 section 527

Writing off or increase of expenditure where balancing adjustment made

Section 527 deals with how the residue of qualifying expenditure on a dwelling-house is adjusted when a balancing allowance or balancing charge arises on the sale of the relevant interest.

When the relevant interest in an assured tenancy dwelling-house is sold, the residue of qualifying expenditure must be adjusted to reflect any balancing allowance or balancing charge
If a balancing allowance is made, the excess of the residue over the net sale proceeds is written off at the time of the sale
If a balancing charge is made, the residue of qualifying expenditure is increased by the amount of the charge at the time of the sale
Where the balancing charge arises under section 517(6), the residue after the sale cannot exceed the net proceeds, preventing the buyer from inheriting a residue greater than the price effectively paid

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