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HMRC internal manual

Business Leasing Manual

Plant and machinery leasing - Anti-avoidance: Non-long funding lease rules: Finance leaseback - Transitional provisions - Sections 228D and 228E

Accounting periods ending on or after 17 March 2004

Section 228D CAA 2001

Where there was a sale and leaseback section 228D CAA 2001 left out of account the amounts received under the sale and leaseback that were above the permitted threshold.

If the pre-commencement rentals were more than the actual rentals taken into account in computing the lessor’s income from the leaseback for periods of account ending before the transitional period, there were rules about the operation of section 228D CAA 2001 in those circumstances at paragraph 7 and 8 of schedule 23 FA 2004:

* The lessor’s excess rentals were the pre-commencement rentals, minus the actual rentals that should be taken into account in computing the lessor’s income or profits for a period of account. 
* If, in the transitional period or a later period, the lessor’s excess rentals, or any untaxed portion of the lessor’s excess rentals, were more than the amount that would be taken into account before the permitted threshold was introduced by section 228D CAA 2001, then section 228D CAA 2001 did not apply for that period. 
* If, there were excess rentals, or an untaxed portion of rentals, for an accounting period that were less than the amount that would have been taxed before section 228D CAA 2001 introduced the permitted threshold, then you increased the permitted threshold for that accounting period. The permitted threshold was increased to the excess rentals plus a fraction of the normal permitted threshold. The fraction for an accounting period was: 
Notional Taxed rental

Notional Taxed Rental means the notional taxed rental for the period of account in question, and

Deductible Excess means the untaxed portion of the lessor’s excess rentals


Andy has entered into a sale and leaseback. Andy receives notional taxed rentals of £15,000 and has a deductable excess of £3,000.

The increase in Andy’s permitted threshold is:

15,000 - 3,000 = 0.8 x his 228D threshold
* In the transitional period the permitted threshold is the greater of, the amount given by the above calculation and, the appropriate fraction of the rental that would have been included if section 228D CAA 2001 did not apply. 
* If a termination occurs in the transitional year then the permitted threshold rules in section 228D(4) CAA 2001 can be increased. 
* The transitional rules end when the lessor excess rentals have been fully taxed. 
* If the leaseback terminates before all of the untaxed portion of the lessor’s excess rentals can be taxed then the balance is taxed in that period by increasing the permitted threshold.

Section 228E CAA 2001

Section 228E CAA 2001 did not apply if the leaseback terminated before 17 March 2004, paragraph 9 of schedule 23 FA 2004.

Chargeable gains

When the leaseback, in a lease and finance leaseback under which the owner has received a premium terminated, the owner may then have disposed of the asset. If a chargeable gain arose, only part of that gain was taken into account for the purposes of calculating capital gains tax or corporation tax on chargeable gains.

That part that was taken into account is at paragraph 10 of schedule 23 FA 2004:

Chargeable gain x (net rentals - termination charge)
Lease premium

Net rentals are the total of the lessee’s deduction for rents minus the finance charges for the leaseback in the lessee’s accounts.

The termination charge is the amount by which the lessee’s income or profits are increased by section 228C(2) CAA 2001.

The lease premium is the premium that the person received for entering into the lease and finance leaseback.


Dave grants a lease and finance leaseback to Rodney in exchange for a premium of £50,000. He pays Rodney net rentals of £40,000 over the life of the lease and then decides to terminate. On termination he receives a termination charge of £5,000.

Dave then sells the asset and realises a chargeable gain of £20,000.

The gain taken into account for the purposes of Dave’s chargeable gains computation is;

20,000 x (40,000 - 5,000) = £14,000