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HMRC internal manual

Business Leasing Manual

Taxation of leases that are not long funding leases: finance lessees: termination adjustments: part exchange of leased assets

Part exchange of assets is a problem specific to leases. Where assets are part exchanged, you may find that, where not material for accounting purposes, the proceeds of the old asset have been netted off against the cost of the new asset. If the assets are both owned outright and are both pooled for capital allowances purposes, using the netted off value makes no difference. But it could do so with finance leases.


  • An asset is sold for £200,000 (written down to nil in the books of the lessee) and replaced by another asset costing £700,000.
  • The new asset has a useful life of 10 years and is to be depreciated using the straight line method (10% each year).
  • For accounting purposes the figures may be netted off showing net additions of £500,000.

The deduction the lessee ought to get in the first year is £70,000 (£700,000 @ 10%). But by netting off the book profit on the old asset (£200,000) against the cost of a new asset (£700,000), the £200,000 proceeds are not brought in and the lessee effectively writes off £250,000 (£200,000 plus £500,000 @ 10%) in the first year.

If you come across a situation like this you should establish why the asset was written down to nil when it had a value of £200,000 and then seek advice from your advisory accountant. It may be, for example, that the deduction for earlier years’ depreciation has been excessive and needs to be adjusted.

If, after having established the facts and sought accountancy advice, you remain concerned that the lessee has gained a material tax advantage you should seek advice from CTISA (CT&BIT).