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HMRC internal manual

Business Leasing Manual

Taxation of leases that are not long funding leases: finance lessors: general taxation issues: example of 'income-into-capital' scheme


A lessor (probably the subsidiary of a bank) may enter into the following sort of sale and lease-back arrangements as part of an ‘income-into-capital’ scheme:

  • a trading company which already owns property needs finance, perhaps to fund its trading activities or to replace more costly borrowing;
  • it sells the freehold or grants a 999 years lease to the lessor banking subsidiary and takes a 35 years under-lease;
  • the lease rentals are calculated to cover the lessor’s initial outlay, its funding costs and its profit margin;
  • the rents start at a low level and are set to increase at various times in the lease, perhaps every five years;
  • the lessor grants an option enabling the option-holder to acquire the lessor’s interest or one very close to it (say, 999 years less 3 days) for a capital sum;
  • the option may be exercised at various times throughout the 35 years lease.

As BLM71035 explains, additional features may include

  • the asset being sold by one member of the borrower group and leased back to another;
  • the purchase option not being over the asset but over the shares in the bank’s leasing subsidiary (which is formed just for the purpose of holding the property);
  • the purchase option being held by another member of the borrower’s group (that is, neither the original seller nor the lessee).