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HMRC internal manual

Business Leasing Manual

’Income-into-capital’ schemes and back loaded leases: Capital allowances: disposal proceeds less than cost of asset - a worked example


A leased asset, cost £1000, generates in year 1 accountancy rental earnings of £120, normal rents (actually received in the year) of £100 and therefore cumulative accountancy rental excess carried forward of £20. At the beginning of year 2 the lease is terminated and the asset is sold.

  • If the asset is sold for less than cost, say, £990 the lessor will suffer a bad debt and will obtain relief under the Case I rules (which was also applied for property income by Paragraph 8 Schedule 12, repealed from 1 April 1998) to the extent that the bad debt deduction in the accounts (£1020 - £990 = £30) has been brought into account for tax (that is £100 - £120 = £20).
  • So overall the lessor is taxed only on £100 of rent received (and gets relief for the £10 loss on the sale of the asset through the capital allowances computation).
  • To complete the picture the cumulative accountancy rental excess of £20 would be reduced to nil under CTa10/S911(5).

If instead the asset is sold for more than cost, say £1030, the excess of the sale proceeds over cost will be excluded from the capital allowances computation under the normal rules and cumulative accountancy rental excess is set against the disposal proceeds for capital gains tax under TCGA92/S37A.