BLM35030 - Taxation of leases that are not long funding leases: sale and leaseback: example; part 1 of 3

The following example is correct for sale and finance leaseback transactions occurring before 9 October 2007. See BLM35026 for changes

Example

The facts are as follows:

• asset purchased for £50,000,
• the useful life of the asset is ten years,
• depreciation rate is 10% a year straight-line,
• at the end of year 5, at which time the carrying value of the asset is £25,000, the owner sells the asset for £30,000 and leases it back under a five year finance lease; the asset is still expected to have a total life of ten years and so must be written down to nil by the end of Year 10,
• rentals (excluding the finance charge element) are £6,000 pa payable in arrear.

The accounting treatment and tax consequences are covered at:

BLM35035: sale recognised for accounting;

BLM35040: sale not recognised, treated as financing exercise.