BLM00305 - Introduction: lease taxation: outline

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.

Lease taxation depends on several factors. 

For all leases, the tax treatment may depend on whether the lease is a finance lease, an operating lease or, for lessees only, a lease relating to a right-of-use asset (outline at BLM11005, details at BLM11000). 

Type of lease 

In the case of leases of plant or machinery the tax treatment will depend on: 

  • the effect of any option or obligation for the lessee to purchase the leased asset - to see whether CAA01/S67 applies to deny the lessor the right to claim capital allowances (see CA23300 onwards).  Guidance on the tax treatment of hire purchase transactions is at BIM40550 onwards (lessor’s receipts) and BIM45350 onwards (lessee’s expenditure) 

  • whether the lease is a ‘long funding lease’.  In very broad terms a lease may be a long funding lease if the lease term (as defined for tax purposes) exceeds 7 years. Detailed guidance on whether a lease is a long funding lease or not can be found at BLM20000 onwards.  BLM40000 onwards deals with the taxation of long funding leases 

  • whether the lease is a “short” lease that falls outside the rules above.  See BLM30000 onwards. 

Type of income 

A lessor’s income usually arises from the leasing of property (land and buildings) or chattels such as plant or machinery. However, intangible assets - such as software - may also be leased. 

The vast majority of such activity amounts to trading. Rarely, as in the case of special leasing, the leasing of chattels may not amount to a trading activity. See below. 

Most of the guidance on property leasing is contained in the Property Income Manual and the Business Income Manual. However, the leasing of property is specifically considered in this manual in two situations. 

  • Finance leasing of property - Part 21 CTA 2010 / Part 11A ITA 2007 (back-loaded leases and avoidance involving ‘income into capital’, BLM70000). Note that Part 21 / Part 11A can also apply to the finance leasing of any other asset. 

  • Leasing (finance or operating) of plant or machinery with property in circumstances where the plant or machinery element of the lease is a long funding lease (see BLM20300). 

As an example of the second situation, where there is the lease of a factory containing manufacturing plant, the element that relates to the manufacturing plant may be a long funding lease. 

Where plant or machinery is leased with land there may be a deemed lease of plant or machinery (BLM20300 onwards).  

Income arising from the leasing of land is taxed as property income, rather than trading income, though the method of computing the profits is the same. 

Whether lessor trading? (Special leasing) 

In general, where chattels are leased, you should accept that the leasing is by way of trade. 

In exceptional cases, however, where the evidence of trading is extremely slight, for example if only one asset has been acquired for leasing and there is no personal involvement by the taxpayer or any semblance of a trading organisation, the taxpayer’s activities may be special leasing within CAA01/S19. 

You should not seek to deny trading treatment where, although there is no personal involvement by the taxpayer, there is trading activity by a manager as agent for the taxpayer. 

The same principle applies to special purpose vehicle lessor companies set up by groups that carry out leasing activities. In such cases it is not unusual for the company to own only one (or a few) assets and be managed by a group member. 

Plant and machinery allowances may be due in connection with special leasing. Compared with allowances available to traders, there are more restrictions on the way non-trading allowances can be used, see CA29450 onwards.