Finance Bill (HC Bill 102)

Finance BillPage 119

(2) No deduction is allowed for an item of a capital nature incurred on,
or in connection with, the acquisition or disposal of a business or part
of a business.

(3) No deduction is allowed for an item of a capital nature incurred on,
5or in connection with, education or training.

(4) No deduction is allowed for an item of a capital nature incurred on,
or in connection with, the provision, alteration or disposal of land.

(5) But subsection (4) does not prevent a deduction being made for
expenditure that—

(a) 10is incurred on the provision of a depreciating asset which, in
being provided, is installed or otherwise fixed to qualifying
land (see subsection (8)) so as to become, in law, part of the
land, but

(b) is not incurred on, or in connection with, the provision of—

(i) 15a building,

(ii) a wall, floor, ceiling, door, gate, shutter or window or
stairs,

(iii) a waste disposal system,

(iv) a sewerage or drainage system, or

(v) 20a shaft or other structure in which a lift, hoist,
escalator or moving walkway may be installed.

(6) No deduction is allowed for an item of a capital nature incurred on,
or in connection with, the provision, alteration or disposal of an asset
for use in ordinary residential property (see subsection (8)).

25But see section 311A (replacement domestic items relief).

(7) If an asset is provided partly for use in ordinary residential property
and partly for other purposes, such apportionment of the
expenditure incurred on, or in connection with, the provision,
alteration or disposal of the asset is to be made for the purposes of
30subsection (6) as is just and reasonable.

(8) In relation to the calculation of profits for a tax year—

(a) “ordinary residential property” means a dwelling-house or
part of a dwelling-house in relation to which an ordinary
property business (see subsection (9)) is carried on in the tax
35year, and

(b) “qualifying land” means land not falling within paragraph
(a).

(9) “Ordinary property business” means—

(a) so much of a UK property business as does not consist of the
40commercial letting of furnished holiday accommodation
(within the meaning of Chapter 6) in the UK, or

(b) so much of an overseas property business as does not consist
of the commercial letting of furnished holiday
accommodation in one or more EEA states.

(10) 45No deduction is allowed for an item of a capital nature incurred on,
or in connection with, the provision, alteration or disposal of—

(a) any asset that is not a depreciating asset (see subsections (11)
and (12)),

Finance BillPage 120

(b) any asset not acquired or created for use on a continuing
basis in the property business,

(c) a car (see subsection (20)),

(d) a non-qualifying intangible asset (see subsections (13) to
5(16)), or

(e) a financial asset (see subsection (17)).

(11) An asset is a “depreciating” asset if, on the date the item of a capital
nature is incurred, it is reasonable to expect that before the end of 20
years beginning with that date—

(a) 10the useful life of the asset will end, or

(b) the asset will decline in value by 90% or more.

(12) The useful life of an asset ends when it could no longer be of use to
any person for any purpose as an asset of a business.

(13) “Intangible asset” means anything that is capable of being an
15intangible asset within the meaning of FRS 105 and, in particular,
includes—

(a) an internally-generated intangible asset, and

(b) intellectual property.

(14) An intangible asset is “non-qualifying” unless, by virtue of having a
20fixed maximum duration, it must cease to exist before the end of 20
years beginning with the date on which the item of a capital nature
is incurred.

(15) An intangible asset is “non-qualifying” if it consists of a right,
whether conditional or not, to obtain an intangible asset without a
25fixed maximum duration by virtue of which that asset must,
assuming the right is exercised at the last possible time, cease to exist
before the end of 20 years beginning with the date on which the item
of a capital nature is incurred.

(16) Where—

(a) 30the person carrying on the property business (“P”) has an
intangible asset, and

(b) P grants a licence or any other right in respect of that asset to
another person,

any intangible asset that consists of a licence or other right granted to
35P in respect of the intangible asset mentioned in paragraph (a) is
“non-qualifying”.

(17) A “financial asset” means any right under or in connection with—

(a) a financial instrument, or

(b) an arrangement that is capable of producing a return that is
40economically equivalent to a return produced under any
financial instrument.

(18) A reference to acquisition, provision, alteration or disposal includes
potential acquisition, provision, alteration or (as the case may be)
disposal.

(19) 45If there is a letting of accommodation only part of which is furnished
holiday accommodation, such apportionments as are just and

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reasonable in all the circumstances are to be made for the purposes
of this section.

(20) In this section—

  • “arrangement” includes any agreement, understanding,
    5scheme, transaction or series of transactions (whether or not
    legally enforceable);

  • “building” includes any fixed structure;

  • “car” has the same meaning as in Part 2 of CAA 2001 (see section
    268A of that Act);

  • 10“financial instrument” has the same meaning as in FRS 105;

  • “FRS 105” means Financial Reporting Standard 105 (the
    Financial Reporting Standard applicable to the Micro-entities
    Regime), issued by the Financial Reporting Council in July
    2015;

  • 15“intellectual property” means—

    (a)

    any patent, trade mark, registered design, copyright
    or design right, plant breeders’ rights or rights under
    section 7 of the Plant Varieties Act 1997,

    (b)

    any right under the law of a country or territory
    20outside the United Kingdom corresponding or
    similar to a right within paragraph (a),

    (c)

    any information or technique not protected by a right
    within paragraph (a) or (b) but having industrial,
    commercial or other economic value, or

    (d)

    25any licence or other right in respect of anything
    within paragraph (a), (b) or (c);

  • “provision” includes creation, construction or acquisition.

307C Cash basis: deduction for costs of loans

(1) Section 307D applies in calculating the profits of a property business
30for a tax year if conditions A to D are met.

(2) Condition A is that the profits of the business are calculated on the
cash basis for the tax year.

(3) Condition B is that a deduction for costs of a loan is allowed in
calculating the profits of the business for the tax year or, ignoring
35section 272A (restricting deductions for finance costs related to
residential property) and section 307D (cash basis: modification of
deduction for costs of loans), would be so allowed.

In this section such a loan is referred to as a “relevant loan”.

(4) Condition C is that an amount of the principal of one or more
40relevant loans is outstanding on the last day of the tax year (and a
relevant loan in respect of which such an amount is outstanding on
that day is referred to in this section as an “outstanding relevant
loan”).

(5) Condition D is that—


45

L > V

where—

  • L is the total outstanding amount of relevant loans (see
    subsections (6) and (7)), and

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  • V is the sum of the values of all relevant properties (see
    subsections (8) to (10)).

(6) The “total outstanding amount of relevant loans”—

(a) if there is only one outstanding relevant loan, is the
5outstanding business amount of that loan, and

(b) if there are two or more outstanding relevant loans, is found
by calculating the outstanding business amount of each such
loan and adding those amounts together.

(7) The “outstanding business amount” of a relevant loan is given by—


10

where—

  • A is the amount of the principal of the loan which is outstanding
    on the last day of the tax year,

  • X is the amount of the deduction for costs of the loan that would
    15be allowed, apart from sections 272A and 307D, in calculating
    the profits of the business for the tax year, and

  • Y is the amount of the deduction for costs of the loan that would
    be allowed, apart from the wholly and exclusively rule and
    sections 272A and 307D, in calculating the profits of the
    20business for the tax year.

(8) A property is a “relevant property” if it is involved in the property
business on the last day of the tax year.

(9) The “value” of a relevant property is the total of—

(a) the market value of the property at the time that it is first
25involved in the property business, and

(b) such amount of any expenditure of a capital nature incurred
by the person carrying on the business in respect of the
property as is not brought into account in calculating the
profits of the business for the tax year or any previous tax
30year.

(10) A property is “involved in the property business” if it is a property
whose exploitation forms the whole or part of the business.

(11) “Costs”, in relation to a loan, means—

(a) interest on the loan,

(b) 35an amount in connection with the loan that, for the person
receiving or entitled to the amount, is a return in relation to
the loan which is economically equivalent to interest, or

(c) incidental costs of obtaining finance by means of the loan.

(12) Section 58(2) to (4) (meaning of “incidental costs of obtaining
40finance”) apply for the purposes of subsection (11)(c).

(13) In this section—

  • “market value”, in relation to a property, means the price which
    the property might reasonably be expected to fetch—

    (a)

    in the market conditions then prevailing, and

    (b)

    45between persons dealing with each other at arm’s
    length in the open market;

  • Finance BillPage 123

  • “property” means an estate, interest or right in or over land;

  • “the wholly and exclusively rule” means the rule in section 34
    (expenses not wholly and exclusively for trade and
    unconnected losses), as applied by section 272ZA
    5(application of trading income rules: cash basis).

307D Cash basis: modification of deduction for costs of loans

(1) Where section 307C provides that this section applies in calculating
the profits of a property business for a tax year, the amount which is
allowed as a deduction for costs of a loan in calculating the profits for
10the tax year is the non-adjusted deduction multiplied by the relevant
fraction.

This is subject to section 272A (restricting deductions for finance
costs related to residential property).

(2) “The non-adjusted deduction” means the deduction for costs of the
15loan that would be allowed, apart from section 272A and this section,
in calculating the profits of the business for the tax year.

(3) “The relevant fraction” means—


where V and L have the same meaning as in section 307C.

(4) 20For the meaning of “costs of a loan” see section 307C.

Property businesses that use, or have used, cash basis

307E Capital receipts under, or after leaving, cash basis

(1) This section applies in relation to a property business carried on by a
person in two cases—

(a) 25Case 1 (see subsections (2) to (4)), and

(b) Case 2 (see subsections (5) to (8)).

(2) Case 1 is a case in which conditions A and B are met.

(3) Condition A is that the person receives disposal proceeds or a capital
refund in relation to an asset in a tax year for which the profits of the
30property business are calculated on the cash basis (see section 271D).

For the meaning of “disposal proceeds” and “capital refund” see
subsections (9) and (10).

(4) Condition B is that—

(a) an amount of capital expenditure (see subsection (11))
35relating to the asset has been brought into account in
calculating the profits of the property business on the cash
basis, or

(b) an amount of relevant capital expenditure (see subsection
(17)) relating to the asset has been brought into account in
40calculating the profits of the property business in accordance
with GAAP (see section 271B)—

(i) by means of a deduction allowed under section 58 or
59 (incidental costs of obtaining finance) (as applied

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by section 272) or section 311A (replacement domestic
items relief), or

(ii) under CAA 2001 (see subsection (20)).

(5) Case 2 is a case in which—

(a) 5condition C is met, and

(b) condition D or E is met.

(6) Condition C is that disposal proceeds or a capital refund arise to the
person in relation to an asset in a tax year—

(a) for which the profits of the property business are calculated
10in accordance with GAAP, and

(b) which is after a tax year for which the profits of the business
had been calculated on the cash basis.

(7) Condition D is that an amount of capital expenditure relating to the
asset—

(a) 15has been paid in a tax year for which the profits of the
property business were calculated on the cash basis,

(b) has been brought into account in calculating the profits of the
business on the cash basis, and

(c) on the assumption that the profits had not been calculated on
20the cash basis at the time the expenditure was paid, would
not have been qualifying expenditure.

(8) Condition E is that—

(a) an amount of capital expenditure relating to the asset has
been brought into account in calculating the profits of the
25property business for a tax year in accordance with GAAP by
means of a deduction allowed under section 58 or 59 (as
applied by section 272) or section 311A, and

(b) that tax year is before the tax year for which the person last
entered the cash basis.

(9) 30“Disposal proceeds” means—

(a) any proceeds arising from the disposal of an asset or any part
of it,

(b) any proceeds arising from the grant of any right in respect of,
or any interest in, the asset, or

(c) 35any amount of damages, proceeds of insurance or other
compensation received in respect of the asset.

See also section 307F for circumstances in which a person is to be
regarded as disposing of an asset.

(10) “Capital refund” means an amount that is (in substance) a refund of
40capital expenditure relating to an asset.

(11) “Capital expenditure” means expenditure of a capital nature
incurred, or treated as incurred, on or in connection with—

(a) the provision, alteration or disposal of an asset, or

(b) the potential provision, alteration or disposal of an asset.

(12) 45The disposal proceeds or capital refund mentioned in condition A or
(as the case may be) condition C are to be brought into account as a
receipt in calculating the profits of the property business.

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(13) In a case where only part of the total capital expenditure incurred, or
treated as incurred, by the person in relation to the asset has been
brought into account in calculating the profits of the property
business (whether or not on the cash basis), the amount brought into
5account under subsection (12) is proportionately reduced.

The reference in this subsection to expenditure brought into account
includes a reference to expenditure brought into account under CAA
2001 (see subsection (20)).

(14) Subsection (12) does not apply if the whole of the amount which
10would otherwise be brought into account under that subsection—

(a) has already been brought into account as a receipt in
calculating the profits of the property business under this
section,

(b) is brought into account as a receipt in calculating the profits
15of the business under any other provision of this Part (except
section 334D(4) (assets not fully paid for)), or

(c) is brought into account under Part 2 or 3A of CAA 2001 as a
disposal value.

The reference to any other provision of this Part in paragraph (b)
20includes a reference to any provision applied by section 272 or
272ZA.

(15) If part of the amount which would otherwise be brought into account
under subsection (12) has already been or is brought into account as
mentioned in subsection (14), subsection (12) applies in relation to
25the remainder of that amount.

(16) For the purposes of this section, any question as to whether or to
what extent expenditure is brought into account in calculating the
profits of a property business is to be determined on such basis as is
just and reasonable in all the circumstances.

(17) 30In subsection (4)(b) “relevant capital expenditure” means capital
expenditure which—

(a) has been incurred (or treated as incurred) by the person
before the tax year for which the person last entered the cash
basis, and

(b) 35is cash basis deductible in relation to that tax year.

(18) For the purposes of this section, a person carrying on a property
business “enters the cash basis” for a tax year if the profits of the
business are calculated—

(a) on the cash basis for the tax year, and

(b) 40in accordance with GAAP for the previous tax year.

(19) Expenditure is “cash basis deductible” in relation to a tax year if, on
the assumption that the expenditure was paid in that tax year, a
deduction would be allowed in respect of the expenditure in
calculating the profits of the property business on the cash basis for
45that tax year.

(20) For the purposes of this section, expenditure is “brought into account
under CAA 2001” in calculating the profits of a property business if
and to the extent that—

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(a) a capital allowance made under Part 2 of that Act in respect
of the expenditure is treated as an expense in calculating
those profits (see sections 248 to 250A of that Act), or

(b) qualifying expenditure (within the meaning of Part 2 of CAA
52001) is allocated to a pool for a relevant qualifying activity
and is set-off against different disposal receipts.

(21) An amount of qualifying expenditure is “set-off against different
disposal receipts” if—

(a) the amount would have been unrelieved qualifying
10expenditure carried forward in the pool for the relevant
qualifying activity, but

(b) the amount is not so carried forward because (and only
because) one or more disposal values in respect of one or
more assets, other than the asset in respect of which the
15qualifying expenditure was incurred (or treated as incurred),
have at any time been brought into account in that pool.

(22) For the purposes of subsections (20) and (21), an activity is a
“relevant qualifying activity” if—

(a) it is a qualifying activity mentioned in section 15(1)(b) to (da)
20of CAA 2001 (property business activities), and

(b) the property business consists of or includes that qualifying
activity.

(23) For the purposes of subsection (21), an amount of qualifying
expenditure incurred (or treated as incurred) by a person is not to be
25regarded as not carried forward because the person enters the cash
basis.

(24) In this section—

  • “disposal value” means—

    (a)

    in subsection (14)(c)

    (i)

    30a disposal value for the purposes of Part 2 of
    CAA 2001 (see, in particular, section 61 of that
    Act), or

    (ii)

    proceeds from a balancing event for the
    purposes of Part 3A of that Act (see section
    35360O of that Act), and

    (b)

    in subsection (21), a disposal value for the purposes of
    Part 2 of that Act;

  • “pool” means the main pool or a class pool to which qualifying
    expenditure is allocated under Part 2 of CAA 2001 (see
    40section 54 of that Act);

  • “provision” includes creation, construction or acquisition;

  • “qualifying expenditure” means qualifying expenditure within
    the meaning of Part 2 of CAA 2001 (see section 11(4) of that
    Act for the general rule);

  • 45“unrelieved qualifying expenditure” means unrelieved
    qualifying expenditure for the purposes of Part 2 of CAA
    2001 (see section 59(1) and (2) of that Act).

307F Deemed capital receipts under, or after leaving, cash basis

(1) This section makes provision supplementary to section 307E.

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(2) If—

(a) at any time a person ceases to use an asset or any part of it for
the purposes of a property business (other than in the
circumstances mentioned in subsection (5)), but

(b) 5the person does not dispose of the asset (or that part) at that
time,

the person is to be regarded for the purposes of section 307E as
disposing of the asset (or that part) at that time for an amount equal
to the market value amount.

(3) 10If at any time there is a material increase in the person’s non-business
use of an asset or any part of it, the person is to be regarded for the
purposes of section 307E as disposing of the asset (or that part) at that
time for an amount equal to the relevant proportion of the market
value amount.

(4) 15For the purposes of subsection (3)

(a) there is an increase in a person’s non-business use of an asset
(or part of an asset) if—

(i) the proportion of the person’s use of the asset (or that
part) that is for the purposes of the property business
20decreases, and

(ii) the proportion of the person’s use of the asset (or that
part) that is for other purposes (the “non-business
use”) increases;

(b) “the relevant proportion” is the difference between—

(i) 25the proportion of the person’s use of the asset (or part
of the asset) that is non-business use, and

(ii) the proportion of the person’s use of the asset (or that
part) that was non-business use before the increase
mentioned in subsection (3).

(5) 30If—

(a) the property business in respect of which capital expenditure
relating to an asset has been brought into account as
mentioned in section 307E is an overseas property business,
and

(b) 35there is a move overseas,

the person is to be regarded for the purposes of section 307E as
disposing of the asset at the time of the move overseas for an amount
equal to the market value amount.

(6) For the purposes of subsection (5) there is a “move overseas” if—

(a) 40the person ceases to be UK resident, or

(b) the tax year is, as respects the person, a split year, and the
overseas part of the tax year is the later part.

(7) The move overseas occurs—

(a) in a case falling within subsection (6)(a), on the last day of the
45tax year for which the person is UK resident, or

(b) in a case falling within subsection (6)(b), on the last day of the
UK part of the tax year.

(8) In this section—

    Finance BillPage 128

  • “capital expenditure” has the same meaning as in section 307E,

  • “market value amount” means the amount that would be
    regarded as normal and reasonable—

    (a)

    in the market conditions then prevailing, and

    (b)

    5between persons dealing with each other at arm’s
    length in the open market.”

24 In section 311A (replacement domestic items relief), in subsection (15)—

(a) for the definition of “the capital expenditure rule” substitute—

  • ““the capital expenditure rule” means—

    (a)

    10in relation to a property business whose
    profits are calculated in accordance with
    GAAP, section 33 (capital expenditure), as
    applied by section 272, and

    (b)

    in relation to a property business whose
    15profits are calculated on the cash basis, section
    307B (cash basis: capital expenditure);”;

(b) in the definition of “the wholly and exclusively rule”—

(i) omit “the rule in”, and

(ii) after “section 272” insert “or 272ZA”.

25 20In section 315 (deduction for expenditure on sea walls), after subsection (6)
insert—

(7) In calculating the profits of a property business on the cash basis, any
reference in this section to the incurring of expenditure is to the
paying of expenditure.”

26 25In section 322 (commercial letting of furnished holiday accommodation),
after paragraph (za) in subsections (2) and (2A) insert—

(zaa) section 307B (cash basis: capital expenditure),”.

27 After section 329 insert—

329A Application of Chapter where cash basis used

30This Chapter applies if—

(a) the profits of a property business are calculated—

(i) on the cash basis for a tax year (see section 271D), and

(ii) in accordance with GAAP (see section 271B) for the
following tax year, or

(b) 35the profits of a property business are calculated—

(i) in accordance with GAAP for a tax year, and

(ii) on the cash basis for the following tax year.”

28 In section 331 (income charged)—

(a) the existing text becomes subsection (1), and

(b) 40after that subsection insert—

(2) This is subject to section 334A (spreading on leaving cash
basis and related election).”