CA37710 - IBA: Enterprise zones: Realisation of capital value: Effect of legislation

The realisation of capital value legislation applies to buildings that qualify for enterprise zone allowances CA37100. It does not apply to any other buildings. It makes the realisation of capital value a balancing event but that balancing event cannot give rise to a balancing allowance.

The capital value realised is deducted from the residue of qualifying expenditure of expenditure at the time that the capital value is realised. This means that:

• if the residue of qualifying expenditure is less than the capital value realised the difference is a balancing charge and no more WDA is made;
• if the residue of qualifying expenditure before the capital value is realised is nil the amount of the capital value realised is a balancing charge; and
• if the residue of qualifying expenditure is more than the capital value realised WDA will still be made after the capital value has been realised. The rate of write-off will not change. There will, however, be a smaller amount of residue to relieve before the rule that says that allowances cannot exceed the residue cuts in CA34800.

Example Dave owns the freehold of a building in an enterprise zone. The expenditure qualifying for enterprise zone allowance is £5m. Dave decides not to take the initial allowance but instead to claim WDA. After 12 months, when the residue of unrelieved expenditure is £3.75m, Dave grants a long-lease to Roger for a premium of £2m. The realisation of capital value rule applies to reduce the residue of unrelieved expenditure from £3.75m to £1.75m. The WDA remains at £1.25m (£5m x 25%) and that will be the amount claimed in the second year but in year three the residue of unrelieved expenditure will be £500,000 and the WDA will be restricted to that amount.