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HMRC internal manual

Business Leasing Manual

’Income-into-capital’ schemes and back loaded lease: 'Income-into-capital' schemes: capital allowances, part 1 of 2

Many income-into-capital schemes involved buildings with a capital allowances content - usually machinery and plant allowances but in some cases 100% initial allowance due in certain enterprise zone cases. Since the allowances were given on the cost of the qualifying asset (i.e. some proportion of the ‘loan’ made at the outset), the capital sum paid by the borrower ought, in principle, to have generated capital allowances recoveries when the option was exercised. However, in many schemes the recoveries were avoided by selling an asset which was economically identical to but technically different from the building. 

Example: the Bank acquires the freehold at the outset for £10 million. The option price of £26 million might then relate to a 999 lease at a nominal rent out of the freehold. This is, to all intents and purposes, worth the same as the freehold but it does not involve the disposal of the freehold interest to which the capital allowances attach.

After the option had been exercised the Bank’s freehold interest is worthless; it commands no income for nearly a 1,000 years. So there would often be arrangements for the freehold to be sold to the Borrower for a nominal sum a little while later. The Borrower then has its original interest in the property back.