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HMRC internal manual

Business Leasing Manual

’Income-into-capital’ schemes and back loaded leases: Relief for set-offs against rentals: cumulative normal rental excess: change of status of lease

One of the elements of the definition of a lease within Chapter 3 of Part 21 of CTA 2010 is that it does not satisfy the definition of a Chapter 2 lease because not all of Conditions B-F in CTA10/S902 have been satisfied. The effect is that a lease which is a ‘new’ finance lease and initially does not satisfy all Conditions B-F in CTA10/S902 (and is therefore within Chapter 3) subsequently satisfies those conditions it ceases to be a Chapter 3 lease and becomes instead a Chapter 2 lease.

In these circumstances, CTA10/S924 ensures that there is continuity in the treatment of the cumulative rental excesses (CARE and CNRE) so that excesses arising in periods when the lease was within Chapter 3 are carried forward to periods when it is within Chapter 2.

It is not possible for the categorisation of a lease to move from Chapter 2 to Chapter 3. This is because a lease which satisfies Conditions B-F in CTA10/S902 at any point and is therefore within Chapter 2 remains within Chapter 2 thereafter until it is either terminated or assigned to (broadly) an unconnected person (CTA10/S901(4)). On such an assignment the lease is treated in the same way as one newly granted. In short, there is a clean break.