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HMRC internal manual

Business Leasing Manual

Taxation of long funding leases: long funding operating lessors: extension of term of long funding operating leases (CAA01/S70YB)

The taxation of a long funding operating lease depends, among other things, on estimating the market value of the asset at the end of the lease term. If the term of the lease is extended beyond the original term the market value will change. In these circumstances the original lease is brought to an end and new lease long funding operating lease is treated as commencing (CAA01/S70YB, see also BLM22020).

An event extends the term of a lease if

  • it has the effect of making a further period non-cancellable
  • it is the grant of an option to the lessee to continue to lease the plant or machinery for a further period, where it is reasonably certain at the time the option is granted that the lessee will exercise it
  • it is the exercise by the lessee of an option to continue to lease the plant or machinery for a further period
  • it does not fall within the preceding bullets, but it has the effect that the lessee will continue, or is reasonably certain to continue, to lease the plant or machinery for a further period.

Where there is an extension, the existing lease is treated as terminating and a new lease as entered into on the ‘effective date’.

The ‘effective date’ is the earlier of

  • the day after the end of the original term, and
  • if the rentals payable are varied as a result of or otherwise in connection with the event, the date on which the variation takes effect.

See BLM41030 for an example.

These rules do not apply where the accountancy classification changes to a finance lease. In that case the rules in CAA01/S70YA apply, BLM22070.