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HMRC internal manual

Business Leasing Manual

Defining long funding leases: amendments, transfers and assignments: extension of term of lease that is not a long funding finance lease (CAA01/S70YC)

The term of a lease which is not a long funding lease may be extended. This will be particularly relevant where the initial term was for 5 years or less.

A succession of short leases is treated as just that, but where the extension would be a long funding lease in its own right then the lease is treated as terminating and commencing at the effective date.

The effective date and events which extend the term of the lease are the same as in CAA01/SS70YB, see BLM22020.

In order to test whether the extension would be a long funding lease you should assume that

  • the existing lease terminates immediately before the effective date
  • another lease (the ‘new lease’) is entered into on the effective date
  • the term of the new lease is the portion of the term of the existing lease, as extended, that remains unexpired as at the effective date
  • the effective date is the date of both
  1. the inception of the new lease, and
  2. the commencement of the term of the new lease.

If, on those assumptions, the new lease would be a long funding lease, the lease is to be treated as if those assumptions were true, ie the existing lease is treated as terminated and a new lease is entered into on the effective date etc.

The same principles apply to subsequent leases.

Where a short lease is extended or replaced by another short lease with the same lessee it may indicate that that was always the intention of the parties - that is, that a series of short leases was planned with the intention of entering into what amounts to a long lease. Where this is the case, you should consider whether the anti-avoidance rule in CAA01/S70I should have applied such that the original lease was not a short lease, see BLM20530. It will also be worth considering whether the second lease is really a short lease.

Please advise CTIS (CT&BIT) if you come across a case where a short lease is extended or replaced by another short lease with the same lessee. CTIS (CT&BIT) would also like to hear about short leases being replaced with another short lease with a person connected to the original lessee.