Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

Business Leasing Manual

HM Revenue & Customs
, see all updates

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

In an income-into-capital scheme the rental schedule for a twenty year lease, which rises sharply after Year 10, is constructed so that the Borrower secures deductions which, in net present value terms, give full relief for the rentals payable. And this is after taking into account the fact that the Borrower group member which becomes the landlord in Year 10 (when the purchase option is exercised) will be taxed from then onwards on the rentals it gets from the lessee (its fellow subsidiary). The early upfront deductions for the lessee are worth enough in net present value terms to give the desired tax relief.

Because the option payment to buy out the lessor’s interest is capital, the borrowing group, viewed as a whole, foregoes the tax deduction it would have obtained if the finance lessor had been repaid wholly by means of rentals. But the borrowing group can set against this loss of tax relief:

  • that part of the lessor’s tax advantage passed on by way of a reduced implicit interest charge in the lease plus option arrangement; and
  • any timing advantages obtained by virtue of the fact that tax relief in the early years of the lease exceeds rentals paid.