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HMRC internal manual

Business Leasing Manual

Defining long funding leases: miscellaneous definitions: term of a lease: CAA01/S70YF

The definition of the ‘term’ of a lease in CAA01/S70YF is a key element in the definition of a long funding lease because it is used in both the definition of minimum lease payments which is part of the lease payments test and the useful economic life test.

The term of the lease is defined as

  • the period following commencement of the lease that is not cancellable (BLM25105), plus
  • any periods covered by one or more options that, at the inception of the lease, it is reasonably certain the lessee will exercise (BLM25110).

Therefore where the lessee has an option to extend the lease term the length of the term depends on whether or not, at inception, the lessee is reasonably certain to exercise the option.

Treat an option to terminate the lease in accordance with the guidance on whether the lease would be regarded as non-cancellable.

The test is performed independently by lessor and lessee and as a consequence it follows that, although in most cases it would be expected that lessor and lessee would take the same view, it is possible for them to take different views regarding the term of the lease.

In order to avoid the lease being classified as a long funding lease, the parties may enter into lease arrangements with the intention of presenting a lease as having a term that is shorter than what is intended. This is countered by an anti-avoidance rule in CAA01/S70YF(5) to (7) (BLM25145).