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HMRC internal manual

Business Leasing Manual

Lease accounting: finance lease accounting: finance lessees: lessee accounting with loaded rental structures

In Example 1 (see BLM15505) the rental payments in the primary lease period were constant throughout. This is not always the case. In some instances payments may be loaded towards the ‘front-end’ of the lease (as was the case in Threlfall v Jones, 66TC77). In others the payments may be loaded towards the back-end (sometimes called balloon leases).

The issue of the Board of Inland Revenue’s Statement of Practice 3/91 was prompted by the existence of a number of structures involving ‘front-loaded’ leases which sought to maximise the tax benefits inherent in finance leasing. It is also undoubtedly the case that some leases where payments are loaded towards the back-end are very tax efficient. But leases with skewed rental profiles are not necessarily all about avoiding tax. Different rental structures may be arranged for a number of reasons. For example, if rentals are to be funded from the income produced by the leased asset and the asset is not fully income producing from the outset, a rental structure which recognises this may be implemented.

Example 2, at BLM15605 onwards, illustrates the consequences of heavily back-loaded rentals.