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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: Purchase options: leaseback rental profile

The profile of the rent payable by the lessee to lessor (Borrower to Bank) under the lease or under-lease is usually unrelated to ordinary market rents demanded by ordinary landlords. The deal is structured as a finance lease. The lease to Borrower has the following features:

  • up to the point, or points, at which Borrower can ‘buy the asset back’ (‘repay the loan’) the rent is low; that is, well below the amount needed to repay the ‘loan’ with ‘interest’;
  • the lease to Borrower will also provide for rentals which generally rise significantly at some point after one of the option dates. These rentals are constructed on a finance lease basis; that is, like any back-loaded finance lease rentals.

The expectation is that the Borrower will opt to get their asset (or something very similar) back when the desired ‘loan’ period is over. The tax timing break gained by Bank from the transformation of its turn into an effectively tax-free capital sum is greater than the benefit gained from deferring the recognition of rental income.