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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 5 of 5 - effect of Chapter 2 of Part 21 of CTA 2010


In the example at BLM71300, the Holder of the option acquires the 999 years lease from Bank on 31 March 1998 for £100 million.


Post 26 November 1996, the minimum taxable earnings of the lessor is the accountancy rental earnings. For example, suppose Year 8 all fell after 26 November 1996, the lessor would be charged on earnings of £13 million instead of £8 million. Nothing is done about earnings which escaped being accrued before 26 November 1996.


The amount of rent payable is calculated in accordance with a Cash Flow which is based on certain assumptions designed to maintain the after-tax profit margin agreed between Bank and Borrower. Under the terms of the lease, adjustments are made to the rents and capital sums if after-tax profit margin agreed between Bank and Borrower is prejudiced. This may happen, for example, if:

  • tax is charged on more than just rent; or
  • Bank is not entitled to Capital Allowances; or
  • the law is changed relating to payments received by Bank from any person in connection with the transaction.

The aim of the adjustment is usually to leave the Bank with the same net margin. How soon the adjustments take effect in terms of rental changes depends on the precise terms of the lease and option agreement. But the effect of such an adjustment is that Borrower has to pay the extra tax charged on Bank.