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HMRC internal manual

Business Leasing Manual

Taxation of leases that are not long funding leases: finance lessees: general issues: structure of the lease

The structure of the lease may have an impact on the timing of the rent deductions. A finance lease normally consists of two distinct periods (see BLM00620 onwards).

  • a ‘primary’ period, which protects the lessor by ensuring that the loan implied in the lease is repaid just as it would be under an actual loan, and
  • a ‘secondary’ period, which protects the lessee by giving the lessee the right to carry on using the asset after the lessee has acquired economic ownership of it.

If these two distinct periods are absent from any finance lease agreement you should consider how the interests of the respective parties are protected and why the lease is structured as it is. For example, the existence of a secondary period may be a pointer to the real economic life of the asset but the lack of a secondary period does not mean the asset’s life (and so period over which it should, in effect, be written off) is limited to the term of the lease.

Guidance on considering the lease term and the correct depreciation method is at BLM32050 and BLM32500 onwards.