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HMRC internal manual

Business Leasing Manual

Taxation of leases that are not long funding leases: finance lessees: asset not depreciated: buildings

Finance leases may also be written for assets, such as buildings in Enterprise Zones qualifying for a 100% initial allowance (see CA37050 onwards) which are not likely to lose value at all over the life of the lease, including any secondary or later periods. The rights in such a leased asset may not be depreciated in the lessee’s accounts drawn up under GAAP.

Effectively, the accounting treatment assumes that the lessee will consume none of the value of the asset during the period he uses it, and that the prospective rental rebate provided for in the lease will not be less than the non-finance charge element of the rentals. In short, the asset is expected to hold its value, so no depreciation charge is necessary and only the finance charge element in the rentals is charged in the profit and loss account over the period of the lease. You should resist any attempt to make a deduction for the non-finance charge element in the lessee’s tax computations.

Only the finance charge element in the rentals is deductible over the period of the lease. Consequently, any rebate of the ‘capital’ element is not taxable and if the rebate turns out to be less than the total non-finance charge element in rentals paid, the difference will be deductible on termination.

If, in accordance with correct accountancy principles, the asset starts to be depreciated during the lease term, a deduction for lease rent equal to the depreciation can be given for tax purposes.