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HMRC internal manual

Business Leasing Manual

Taxation of leases that are not long funding leases: finance lessees: termination adjustments: terminal rebate

A terminal rebate received on the termination of a finance lease is normally a revenue trading receipt. Although the lease itself is a capital asset (see RTZ Oil & Gas v Elliss, 61TC at 172), and sums received (or paid) on the disposal of a capital asset are normally capital (see for example Mallett v Staveley Iron & Coal Co., 13TC772), that does not make the rebates received by the lessee capital in nature.

The nature of the rebate depends on the commercial context of the transaction and it is impossible to distinguish the character of the rebate from the rentals themselves. In contrast in cases like Staveley the sums paid to terminate leases were in no sense an increase in rents for past periods that only ensured the lessor obtained a financier’s return.

Regarding the rentals as what they are - a rent or hire charge - and the rental rebate as a refund of rentals means that the lessee receives a deduction for the net amount of rent paid over the life of the lease.