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HMRC internal manual

Business Income Manual

Leasing: avoidance: assets other than land: capital sums examples

The examples below illustrate the working of the capital sums legislation.

Example 1

Alan, a trader, leases plant from B Ltd (a leasing company) for 23 years at a rent of £4,000 a year for three years and £1 a year thereafter.

After three years Alan assigns his lease to C Ltd.(a financial dealing company entitled to write off, over the remaining 20 years, the price it pays for the assignment) for £5,000.

This amount £5,000 being less than the £12,000 relieved is chargeable to Income Tax on Alan under the capital sums legislation.

Example 2 - associated persons

D Ltd (a leasing company) has a trading subsidiary, E Ltd.

D Ltd hires plant from Freda for 20 years at a rental of £40,000 a year for three years and thereafter at £1,000 a year.

On the following day D Ltd sub-lets the plant to E Ltd. for 20 years less one day at £80,000 a year for three years and thereafter at £1,000 a year.

D Ltd then assigns its lease from Freda, with the benefit of the sublease, to G Ltd (a financial dealing company) for £70,000.

The relieved payments by D Ltd’s associate E Ltd exceed this capital sum of £70,000, which is therefore chargeable to Corporation Tax on D Ltd.

Example 3 - hire-purchase

A machine, the cash price of which would be £90,000, is acquired under a hire-purchase agreement providing for three annual payments of £40,000 (£30,000 capital and £10,000 rent). The machine is brought into use immediately and so capital allowances are given on the full £90,000.

After two annual payments have been made, the benefit of the hire-purchase agreement is assigned by the hire-purchaser to a third party for £75,000.

The disposal proceeds for capital allowances purposes include the capital expenditure on the third payment of £30,000 that has still to be incurred. So the disposal proceeds are £105,000 (= £75,000 + £30,000) and this is restricted to £90,000, the total capital expenditure which would have been incurred if the contract had run its full length - see CA23330). Capital allowances given amount to nil (as a result of bringing the disposal value into account).

There have been two tax-relieved payments of £10,000 (total £20,000). The part of the capital sum that is not brought into the capital allowances computation as a disposal value is £15,000 (= £30,000 + £75,000 - £90,000).

£15,000 is therefore chargeable under the capital sums legislation.