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HMRC internal manual

Business Leasing Manual

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HM Revenue & Customs
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’Income-into-capital’ schemes and back loaded leases: 'Income-into-capital' schemes: example, part 2 of 5 -accountancy treatment - detail

Example

In the example at BLM71300 the lessor (Bank) accounts for the transaction as a finance lease. The option is likely to be exercised because Bank will charge Borrower more if it gets its money back in taxable form (as rents) rather than as a capital sum which escapes tax. So Bank will get back its ‘loan’ with ‘interest’. Accounting standards therefore require the excess of option proceeds over the cost of the property (£100m - £70m = £30m) to be included in income annually. It is ‘interest’ and will be spread using the normal accountancy approach; that is, in proportion to the debt outstanding each year, see BLM14000 onwards.

This means that over the 7 year period ‘interest’ of £70m will be recognised as income. Bank’s expenses (Bank’s funding costs) over the 7 year period total £63m (£9m x 7 years). So there is a net overall commercial profit of £7 million. The profit and loss account comes down to:

In £millions

Year 1 2 3 4 5 6 7 8 Total
                   
Option excess   4 4 4 4 4 5 5 30
Rent   3 4 5 6 7 7 8 40
Total income   7 8 9 10 11 12 13 70
Expense   -6 -7 -8 -9 -10 -11 -12 -63
Profit/(Loss)   1 1 1 1 1 1 1 7