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HMRC internal manual

Business Leasing Manual

Taxation of leases that are not long funding leases: finance lessees: general issues: consequences of lease being a capital asset

Although the treatment of payments made by the lessee is generally a question of timing, the lease is nonetheless a capital asset (see RTZ Oil & Gas v Elliss, 61TC at page 172) in the lessor’s hands. The sort of payments that might be affected by this include

  • guarantee fees - fees which arise under a guarantee entered into in order to secure the funding/lease are ‘capital’ - see BLM32045
  • other incidental costs - expenditure incidental to entering into, varying the terms of, or cancelling of a finance lease, is capital on ordinary Schedule D Case I principles (this does not normally cause terminal rentals under a finance lease to be capital - see BLM32310)
  • adaptations to leased asset - expenditure incurred by the lessee is capital in nature; but in practice the lessor usually pays for the adaptations and treats them as a supplementary lease.