CA37705 - IBA: Enterprise zones: Realisation of capital value: Background

CAA01/S327 - S331

Where a person who holds the relevant interest in an industrial building sells the interest within the normal 25-year period, there is a balancing adjustment on the person. Prior to January 1994, the capital value of the relevant interest could be realised without incurring a balancing adjustment by disposing of the commercial substance of the interest while retaining the interest itself. The commonest methods were:

• To grant a lease of more than 50 years duration out of the relevant interest for a premium and a ground rent. (The lessor and lessee can however elect jointly for the grant of the lease to be treated as the sale of the relevant interest; if so there is a balancing adjustment on the lessor and the relevant interest, and hence the entitlement to IBA, is transferred to the lessee CA33100).
• Where there is an existing lease out of the relevant interest of more than 50 years duration, to accept a capital sum from the lessee in return for the reduction of future rentals to a ground rent.

Following the case of Regina v CIR ex parte Matrix-Securities Ltd. 66TC587 the Government decided to close this loophole for buildings in enterprise zones. It remains open for other industrial buildings. Under the rules introduced in 1994, a balancing charge arises where a person holding the relevant interest in a building that qualifies for enterprise zone allowances receives capital value attributable to a subordinate interest in the building within 7 years (or in certain circumstances at any time in the normal 25 year period) of acquiring the relevant interest.