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HMRC internal manual

Business Leasing Manual

From
HM Revenue & Customs
Updated
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Defining long funding leases: exclusions from the definition of funding lease: example 1

Lessor Plc leased an aircraft to A Ltd on a 6-year lease that ended on 30 April 2000 and the same aircraft was leased for a further 6 years to B Ltd from 1 June 2000 to 31 May 2006. When the second lease ended Lessor Plc granted C Ltd a 10-year lease beginning on 1 July 2006. The new 10-year lease is not a long funding lease because the aircraft had been leased for more than 10 years before 1 April 2006 and Lessor Plc was the lessor of the aircraft on the last day before 1 April 2006 on which it was leased (here, 31 March 2006).

Had the second lease been for 5½ years and ended on 30 November 2005 and the third lease still been entered into on 1 July 2006 the third lease would still not be a long funding lease because Lessor Plc was the lessor of the aircraft on the last day before 1 April 2006 on which it was leased (here 30 November 2005).

Had Lessor Plc sold the aircraft to another lessor before the third lease was entered into, the third lease would be classified as a long funding lease or not using the normal tests for establishing whether a lease is a long funding lease. Thus, for example, if the aircraft’s remaining expected useful economic life was only the remaining 10 years of the third lease the lease would be a long funding lease because it meets the useful economic life test in CAA01/S70P.