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HMRC internal manual

Business Leasing Manual

’Income-into-capital’ schemes and back loaded leases: 'Income-into-capital' schemes: lessee's accountancy treatment

In accounting terms the lessee company may have an operating lease (not a finance lease) because it doesn’t have the benefit of the asset for its full life (just like any tenant of building who has a lease for less than the life of the building.) After twenty years the lease ends and the fellow group member (the option holder who becomes the landlord) will hold the asset unencumbered by any lease. Because the lease is an operating lease, the total rentals due to be paid by the lessee for the whole twenty years of the lease will, ordinarily, be deducted in the commercial accounts evenly over the entire lease period.

At the group level the Borrower will have a finance lease from the Bank because the deal ensures the Borrower gets back the original interest. But the group position is not relevant when considering the position of any individual group member.