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HMRC internal manual

Business Leasing Manual

HM Revenue & Customs
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’Income-into-capital’ schemes and back loaded leases: 'Income-into-capital' schemes: example part 4 of 5, tax treatment - purchase option


In the example at BLM71300 eventually Bank (the lessor) is taxable on the gain arising when it sells the 999 years lease to the option-holder. This is within the capital gains regime and in computing the taxable gain Bank can deduct the cost of the asset and indexation allowance on the cost. If there is any residual gain, capital losses are available to cover it. Assuming a rate of 4% a year, the effect of indexation allowance might look like this.

In £millions

Disposal Proceeds 100
Cost 70
Indexation 20
Gain 10


Bank (the lessor) is therefore getting indexation allowance to set against what is in substance interest. If it had made a normal loan it would not be able to do so. Also, Bank can use capital losses or roll-over reliefs which cannot normally be used to shelter income.