BLM00515 - Introduction: Lease taxation: lease not long funding lease: lessors basis for recognising finance lease income

This manual is being updated to reflect FRS 102 (2024 amendments). For guidance on the tax treatment of accounts prepared under IFRS 16 or the revised FRS 102, please refer to pages within the BLM50000 chapter.

In broad terms the taxation of听rentals can be thought of as based on an accruals听basis, with the rentals听receivable in respect of a particular period being taxed as income of that period.听听As such, a finance lessor is taxed on all the rental income it receives even though only the 鈥榠nterest鈥� element is shown as income in the accounts.听

Capital and interest elements听

What this manual refers to as the 鈥榗apital鈥� element in the rentals is part of what are, for tax purposes, revenue earnings. The gross rentals are only split into 鈥榠nterest鈥� and 鈥榗apital鈥� elements in an economic sense.听 Since the 鈥榗apital鈥� element is a revenue receipt for the lessor it is necessary to establish听the basis on which it should be recognised for tax purposes.听

For the tax treatment of the 鈥榠nterest鈥� element in the rentals, the aim is to follow the accountancy.听 As in other situations, the accountancy often provides a ready-made measure of the income for tax purposes - however, in this case, accountancy only provides a measure of part of a finance lessor鈥檚 income.听

For the tax treatment of the 鈥榗apital鈥� element in the rentals, there is no accountancy model which can be followed. Unless the lease is a long funding lease, even though for accountancy purposes it is loan repayment and a balance sheet item,听the capital element in the rentals is income for tax purposes.听

Timing听

Where the lease is not a long funding lease (鈥楲FL鈥�), the following general principles should be borne in mind in connection with the timing of a finance lessor's rental income:听

  • there is no principle of tax law which requires symmetry between lessor and lessee in the timing of rentals;听

  • where the lessor's rentals are chargeable as trading income the rentals should normally all be recognised over the primary period () of the lease (even if the lessee's rental payments would be recognised over a longer period) since normally the lessor's economic stake in the transaction virtually comes to an end at the conclusion of the primary period of the lease;听

  • you should apply whatever method of recognising rental income for tax purposes is in use to all finance leases written by the same lessor and by connected lessors, especially other leasing companies in the same group; in particular, you should resist attempts to adopt different methods of recognition for leases with different rental profiles (whether flat-rate, front-end loaded or back-end loaded).听

Long funding leases听

See BLM20000 for guidance on the timing of the taxation of rentals on long funding leases.

Income into capital schemes and back loaded leases听

You should also be aware of the rules in Part 21 CTA 2010 / Part 11A ITA 2007. These are covered in detail at BLM70000 and counter听

  • arrangements that turn what would normally be the lessor鈥檚 rental income into a capital gain听

  • arrangements that deferred the recognition of income for tax purposes, thus producing a mismatch between the commercial accounts听earnings and the tax earnings.听

Sale and finance leaseback and lease and finance leaseback听

In addition听there are rules that in some circumstances restrict the taxable element of a finance lessor鈥檚 income in the case of a sale and finance leaseback and lease and finance leaseback, see鈥�CA28000鈥痑苍诲鈥�CA28900鈥痮苍飞补谤诲蝉.听

Further details are at BLM33015.听

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