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HMRC internal manual

Business Leasing Manual

Introduction: Lease taxation: Outline

Lease taxation depends on a number of factors.

For all leases the tax treatment may depend on whether the lease is a finance lease or an operating lease (outline at BLM00035, details at BLM11000).

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

  • the effect of any option for the lessee to purchase the leased asset - to see whether CAA01/S67 applies to deny the lessor the right claim capital allowances (BLM00325 onwards)
  • exceptionally, whether a chattels (typically plant or machinery) lessor is trading or not (BLM00315)

In addition, following FA 2006, the taxation of leases of plant or machinery will depend on whether the lease is what is known as a ‘long funding lease’.

The section of this manual beginning at BLM30000 covers the pre FA 2006 rules which continue to apply to most leases. Broadly, this treatment applies to

  • leases that commenced prior to 1 April 2006
  • leases that commenced on or after 1 April 2006 that are not long funding leases.

In very broad terms a lease may be a long funding lease if the lease term (as defined for tax purposes) exceeds 5 years. Detailed guidance on whether a lease is a long funding lease or not can be found at BLM20000 onwards. Note that where plant or machinery is leased with land there may be a deemed lease of plant or machinery (BLM20300 onwards).

The section of this manual beginning at BLM40000 deals with the taxation of long funding leases.

These issues are outlined in a little more detail on the following pages.