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Capital Allowances |
41 |
24A.3.3.1 Election for Long Lease |
The rigid insistence on tying the right to the allowance to the relevant interest would be inefficient in circumstances where, for example, a pension fund (which pays no tax and which therefore cannot make use of the allowances) wishes to finance the construction of a building which would then be used by a tenant under a long lease. Therefore, where a long lease is granted, and both lessor and lessee so elect, the lessee may claim the allowances even though the expenditure was incurred by the lessor. The mechanism for this change is that the newly created lease is designated the relevant interest in place of the reversionary interest.385 The same applies where a long sub-lease is created out of a lease. Any capital sum paid by the lessee (or sub-lessee) becomes the sum in respect of which the allowance can be claimed. It follows that the grant of such a lease may cause a balancing allowance or charge to accrue to the lessor. A long lease is defined as one exceeding 50 years.386 |
| 24A.3.3.2 No Election |
The election may generally not be made where lessor and lessee are connected persons.387 The election is also excluded if it appears that the sole or main benefit which might be expected to accrue is the obtaining of a balancing allowance.388 It appears that the sole object of obtaining a balancing charge, perhaps to soak up other reliefs, does not prevent the election rule from operating. |
24A.3.3.3 Initial Allowance for Lessee |
If the building has not been used before the lease is granted, the lessee may claim not only the writing down allowance but also, in the very limited circumstances now prevailing in relation to enterprise zones any initial allowance. This is of particular importance where the lessor is an exempt person, such as a local authority or charity, since it is only the lessee who will have taxable income against which is to set the allowance. |
24A.3.3.4 Lease Ends: Allowances Continue |
If the relevant interest is a lease, the holder of that interest may still claim the allowance even after the lease has ended, if there is a holding over with the consent of the landlord, or a new lease is taken in pursuance of an option in the first lease.389 Where the lease is surrendered and so becomes merged in another interest, that other interest becomes the relevant interest so that the right to the allowance is not lost390—similarly if the lessee acquires the reversionary interest. This scheme does not apply where the new lease is granted to the original lessee otherwise than under a right in the original lease. In such circumstances a balancing allowance or charge cannot be avoided. |
| If the relevant interest is a lease and the lease ends but the landlord pays the lessee a sum, eg for improvements carried out by the lessee, the lease is treated as if it had been surrendered.391 If the landlord grants a new lease to a different person and the new lessee pays a sum to the first lessee, the leases are treated as one and the same so that the new lessee now has the ‘relevant interest’.392 |