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HMRC internal manual

Business Leasing Manual

HM Revenue & Customs
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‘Income-into-capital’ schemes and back loaded leases: Introduction to 'income-into-capital' schemes: pre-FA97/Sch 12

Tax avoidance was possible, pre-FA97/Sch 12 (now Part 21 of CTA 2010), on leases of real property because part of the lessor’s ‘interest’ return was taken in the form of a capital sum. Lessors argued that the capital sum was outside the charge on property income (see BLM70020). The ‘interest’ amounted to a capital gain and was usually covered by indexation and other reliefs.

The gross earnings in the commercial accounts under GAAP - the ‘interest’ line at the bottom of the example at BLM70035 - would be exactly the same for both straightforward deferral leases and for income-into-capital schemes (back-loaded rentals with a capital sum). The ‘loan repayment’ element in the capital sum would just go straight to the balance sheet to pay off the ‘loan’.