’Income-into-capital’ schemes and back loaded leases: 'Income-into-capital' schemes: the effect of the deal, part 2 of 2
In the example at BLM71010 there is not a loan in legal terms but the net result is the same. The Borrower gets £10 million by parting with their property at the outset and repays the £10m with ‘interest’ in Year 10. Ignoring tax and any modest actual rent, the interest on a £10 million loan compounded at 10% for ten years at annual rests is £16 million. So the lump sum the lender has to pay under the option is £26 million. In practice, the bank would charge less than £26 million because of the tax savings on the £16 million ‘interest’ turn. Only a single sum would be paid by the Borrower - the ‘interest’ element is not identified separately.
There may also be an added benefit to the Bank from capital allowances. In the example given above capital allowances might have been given on £10 million - perhaps £9 plus million if 25% writing-down allowances applied by the time the option is exercised. But the net cost to the Bank is nil because it effectively recovers the £10 million cost.