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HMRC internal manual

# Taxation of leases that are not long funding leases: How tax advantages arise: timing differences - finance lessor, a worked example, part 2 of 4

In the example in BLM30040 the finance lessor is taxable (like the bank) on a profit of £20 at the end of the day, but the 25% capital allowances of £250 due to the lessor in Year 1 will create an upfront tax loss of £76. This is on a simplified calculation which assumes:

• the total rentals of £1,200 are split evenly between the years
• the ‘interest’ in and out is front-loaded
• the ‘other expenses’ are slightly front-loaded
• the asset is purchased at the start of Year 1.

This produces the following computation for the finance lessor for Year 1:

 Gross rents receivable (£1,200 ÷ 5) £240 Less interest payable £58 Gross profit £182 Less other expenses £8 Net profit £174 Less capital allowances £250 Tax loss (£76)

The loss is recovered later and the overall profit of £20 is taxed, as the following tax computations for the finance lessor for the whole five years shows:

 Year 1 Year 2 Year 3 Year 4 Year 5 Totals Gross rent 240 240 240 240 240 1,200 Less interest payable 58 45 32 19 6 160 Gross profit 182 195 208 221 234 1,040 Less other expenses 8 4 4 4 20 Net profit 174 191 204 217 234 1,020 Less WDA and BA 250 188 141 105 317 1,000 Taxable profit (loss) (76) 4 64 112 (83) 20

The capital allowances for Year 5 assume a short-life election has been made and a balancing allowance is due on the worthless asset, thereby relieving the entire net cost over the 5 years.

With longer leases there are likely to be tax losses in the first few years. For example if the lease is over a 25-year term there could be tax losses in the first 6 or 7 years. Tax losses may be generated for longer periods by structuring the payment profile appropriately. The longer the period of losses, and the greater the delay in recovering the tax, the greater the timing advantage.