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HMRC internal manual

Business Leasing Manual

Taxation of long funding leases: Lessees: Terminations:

A finance lessee may receive a sum at the end of the term of a lease, whether the lease runs to full term or not. This is often referred to as a refund of rentals. Under general principles this refund would be taxable as income of the trade or other activity, but in the case of a long funding lease it is taken into account in computing the disposal value. CTA10/S378 ensures that this sum is not brought into account as income under general principles.


A Ltd leases a machine that cost £100,000 from B Ltd under a full payout finance lease over 8 years. The lease is a long funding lease and A claims capital allowances on £100,000. At the end of the lease, by which time A Ltd has - in effect - paid B Ltd for the full cost of the machine plus interest, the machine is worth £10,000 and A Ltd requires B Ltd to sell it. The lease agreement requires B Ltd to pay 99% of the sale proceeds to A Ltd as a refund of rents and so A Ltd receives £9,900.

If the lease had not been a long funding lease, the £9,900 would have been taxable as income of A Ltd. However, as the lease is along funding lease A Ltd brings £9,900 into its capital allowances computation as a disposal value. Further guidance is at CA23825.