Revenue Note for Guidance
This section contains the rules relating to the interpretation of the term “the relevant interest”. The term is defined in relation to expenditure incurred on the construction of a building or structure, and means the legal interest (whether freehold or leasehold) to which the person who incurred the expenditure was entitled when that expenditure was incurred. Entitlement to writing-down allowances (section 272) and balancing allowances (section 274), and liability to balancing charges (section 274), in respect of any capital expenditure follows the relevant interest in relation to that expenditure whether or not that interest is subsequently transferred to another person.
(1) In relation to any expenditure incurred on the construction of a building or structure, the relevant interest is the interest in that building or structure to which the person who incurred that expenditure was entitled when he/she incurred it.
B incurs capital expenditure of €100,000 in 2002 on the construction of an industrial building or structure on land on which the various interests at the time the expenditure was incurred were as follows —
A held the freehold interest in the land, subject to B’s leasehold interest of 99 years.
The relevant interest in relation to the €100,000 capital expenditure is the 99 year lease held by B. If B were to sell this lease to C in 2006, C would become the holder of the relevant interest in relation to the expenditure and would be entitled to writing-down allowances in respect of that expenditure from that year onwards, provided the building or structure is in use for the purposes specified in section 268(1).
(2) Where the person incurring the expenditure on the construction of a building or structure has 2 or more interests in it, the interest which is reversionary on all other interests is the relevant interest.
A holds a sub-lease of land from B who in turn holds a lease from C, the freeholder. If A’s sub-lease is about to expire shortly, she would be reluctant to incur expenditure on constructing a new building; but, if she were able to purchase the freehold reversion from C, she could incur such expenditure secure in the knowledge that the land and building would revert to her when B’s lease expired. Where the lease and sub-lease would expire at more or less the same time, A would not normally bother to buy out B’s interest. In such circumstances A would own 2 interests in the land at the time she incurred capital expenditure on the building – viz the original sub-lease and the freehold reversion acquired from C. In such a case the larger interest – that is, the freehold – is to be taken as the relevant interest.
(3) A relevant interest does not cease to be the relevant interest where a lease or other interest is created out of it. Where the relevant interest is a leasehold interest and it merges into the freehold (or a superior lease) either because the owner of the relevant interest acquires the reversion or the owner of the reversion acquires the relevant interest, the freehold (or the superior lease) becomes the relevant interest.
A trader holding a lease of land built a factory on it in 2002 when there was 20 years of the lease to run. He is entitled to writing-down allowances of 4 per cent per annum. If, with 5 years of the lease still to run, he acquires the freehold, this does not trigger a balancing allowance because he has ceased to own the relevant interest, that is, the leasehold interest. Instead, the freehold is treated as the relevant interest and this ensures that no balancing allowance will arise but that the trader may continue to receive writing-down allowances until the expenditure on the factory is fully written off.
Relevant Date: Finance Act 2021