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HMRC internal manual

Business Leasing Manual

Taxation of leases that are not long funding leases: lease and leaseback: with premium

In a typical tax-driven transaction, a business grants a head lease to a bank (or other lender) for a premium. The bank then grants a typical finance lease to the business.

Commercially, this is equivalent to the bank making a loan to the business and the business repaying it at interest.

However, the lease premium is generally regarded as a capital receipt that is effectively not taxed on the recipient but the rentals under the leaseback were claimed to be allowable for tax purposes. The commercial effect is that the business (the head lessor and sub-lessee) obtains a loan and get tax relief for repaying it.

These arrangements were stopped by FA 2004. CAA01/S228B (as amended by FA 2008) denies relief for the capital element of the leaseback rentals. For further guidance, see CA28910.

In a variant on these arrangements, the bank sold the lease receivables at market value to a third party. This meant that the bank did not account for the lease as a finance lease. Such arrangements are caught by the provisions of CTA10/S752 onwards.