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HMRC internal manual

Business Leasing Manual

Taxation of leases that are not long funding leases: finance lessees: taxation generally: capital/revenue issues, character of rents paid under finance lease

Capital treatment for lease rentals will be exceptional. But in appraising a new lease it is always important to step back from the detail and to consider the overall effect of the arrangements. There can be a tendency to assume that because something is described as a finance lease it must follow that what is paid under the agreement is (revenue) payments of rent. It is important to step back from the detail of the transaction and to consider the nature of the asset and what the payments are for.

For example, there have been instances in which 999 year leases of land are being acquired in the form of what is purported to be finance lease rentals. If the true effect of such a lease is that an interest in land has been created and is being paid for in the form of capital instalments described as rent, the payments are capital for tax purposes.

But while it is not difficult to see a distinction between (on the one hand) capital payments to acquire a 999 year lease of land and (on the other hand) rents paid under a finance lease of, say, machine tools with a life expectancy of less than 10 years, the exact dividing line between the two may not always be so easy to discern.

If there is any doubt as to the effect in any particular case - and thus as to whether the payments made are revenue or capital - you can obtain further advice from CTISA (CT&BIT)