CA90800 - Structures and buildings allowance (SBA): relevant interest: termination of a lease

CAA01/S270DD, S270DE, S270IG

Leases granted for 35 years or more

When the lessee has been entitled to claim SBA on the lessor’s qualifying expenditure because they were treated as acquiring the relevant interest when the lease was granted CA90600, and that lease comes to an end, the relevant interest is treated as reverting to the lessor, who can claim any remaining SBA.

Capital expenditure incurred by the lessee

When a lessee has incurred expenditure as in CA90700 during the period of their lease and the lease terminates, entitlement to SBA on that expenditure ceases.

Lease treated as continuing

However, a lease which terminates is treated as continuing if it is renewed, extended or replaced, as outlined below:

• if the lessee remains in possession of the building with the lessor’s consent without a new lease being granted, the lease that has terminated is treated as continuing for as long as the lessee remains in possession
• if there was an option, under the terms of the lease that has terminated, for the lessee to be granted a new lease and the lessee exercises that option, the new lease is treated as a continuation of the old lease
• if another lease is granted to a different lessee and the new lessee pays a sum to the old lessee in connection with the transaction, the lease is assigned to the new lessee by the old lessee; the new lease is therefore treated as a continuation of the old lease.

While the lease that has terminated is treated as continuing, the lessee can continue to claim SBA on their own expenditure CA90700 as well as, where applicable, any SBA they are entitled to as a result of the terms of the lease CA90600.

Example 1: grant of a long lease at a large premium

Rebecca constructs an office building and incurs £1,000,000 of qualifying expenditure. She grants a 40-year lease to Asjad, meeting the conditions in CA90600. When Asjad brings the building into qualifying use, he is entitled to claim SBA on Rebecca’s qualifying expenditure, £1,000,000, for the duration of the lease.

Example 2: expenditure incurred by a lessee

Following the grant of the lease in Example 1, Asjad incurs £500,000 of capital expenditure on fitting out the office building to his required specifications. This expenditure qualifies for SBA as Asjad is in possession of the relevant interest, the leasehold interest, relating to the £500,000 expenditure. Asjad is able to claim SBA on this expenditure for the duration of the lease. The record of expenditure and calculation of SBA for this additional capital expenditure must be kept separately from that of the original construction costs of the building.

Example 3: expiry of a lease

After the 40-year lease in Examples 1 and 2 expires, the relevant interest for the construction expenditure of £1,000,000, reverts to Rebecca, the lessor. Rebecca is now entitled to claim any remaining SBA on the original qualifying expenditure of £1,000,000. The entitlement to SBA on the £500,000 of capital improvements is lost because the relevant leasehold interest in fitting out works to the office building expires with the lease, so neither Asjad nor Rebecca can continue to claim SBA on any remaining amount.

Example 4: new subsequent lease granted by lessor

Following the events of Example 3, Rebecca grants a 5-year lease to Charlotte. This lease is not for 35 years or more, so Rebecca retains the relevant interest and can continue to claim the SBA, on £1,000,000, for this period.

Example 5: assignment of lease

Alternatively, if following Example 2, Asjad had 10 years of his lease remaining and Charlotte paid Asjad to take over the remaining term of the lease, the lease would have been assigned to Charlotte by Asjad. The lease would therefore be treated as continuing and Charlotte would be able to claim the SBA on Rebecca’s qualifying expenditure, for the remainder of the duration of the lease.