CA41400 - ABA: Anti-avoidance: transfer subject to subordinate interest

CAA01/S389 - S390

If there was no legislation to stop it, a person could recover the construction costs of an agricultural building as follows. The person would grant a lease of the building at a low rent or for a premium and no rent, sell the relevant interest and make an election with the purchaser to treat the sale as a balancing event. The grant of the lease would reduce the value of the relevant interest and so the sale price. This would create or increase a balancing allowance. There is anti- avoidance legislation to stop that happening.

The anti-avoidance legislation applies to reduce a balancing allowance in the two cases below.

1. The relevant interest is subject to a subordinate interest and two or more of the following people are connected:

• the person who owned the relevant interest,
• the person who acquires it, and
• the person that the lease is granted to.

2. The relevant interest is subject to a subordinate interest and the transfer of the relevant interest is part of a scheme to obtain a tax advantage. A scheme to obtain a tax advantage is one where it appears that the sole or main benefit that might be expected to arise from the transfer of the relevant interest is the obtaining of an ABA or a balancing allowance.

The reduction in the balancing allowance is the sum of:

• any premium received for the grant of the lease, and
• the amount by which the proceeds of the balancing event would have been greater if the rent payable under the lease had been a commercial rent and the relevant interest had been sold at market value.

The buyer's allowances are calculated as if the seller had received the balancing allowance.

The legislation reduces a balancing allowance. It cannot change a balancing allowance into a balancing charge. So if the premium received for the lease is more than the amount of the balancing allowance it does not turn it into a balancing charge.

Example Warren owns West farm. Jackson controls a company called My Musical Memories Ltd, which runs pop festivals. Warren agrees to sell West farm to My Musical Memories Ltd to be used as a base for open-air pop festivals. Warren has spent £1 million on farm buildings in recent years and the residue of expenditure is now £750,000. He wants to avoid a balancing charge when he sells the farm and would like to recover the rest of his expenditure on the buildings as a balancing allowance. This is how he arranges things.

Warren grants a 999-year lease of the farm to My Musical Memories Ltd for £2 million. He then sells the freehold of the farm to Jackson for £10,000. £5,000 of that £10,000 relates to the farm buildings. Warren and Jackson make an election to treat the sale as a balancing event. There is no balancing charge and Warren claims a balancing allowance of £745,000 (= £750,000, residue before sale, less £5,000, sale proceeds). Jackson and My Musical Memories Ltd are connected and so the anti-avoidance legislation applies. Warren's balancing allowance claim is refused. The £2 million My Musical Memories Ltd pays Warren for the grant of the lease is deducted from the balancing allowance of £745,000 and reduces it to nil. The allowances given are not recovered as a balancing charge of £250,000 because the legislation cannot turn a balancing allowance into a balancing charge. Jackson's allowances are calculated as if Warren had received the balancing allowance and so they are based on a residue after sale of £5,000.