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HMRC internal manual

Business Leasing Manual

’Income-into-capital’ schemes and back loaded leases: Bad debts: lessor's rentals within trading income

Part 21 of CTA 2010 contains no special relieving provisions for lease rentals which become bad or doubtful. This is because the trading income rules give appropriate relief as they stand.

For example, take the case of an existing lease with a stepped rental profile outside Part 21 where the lessee becomes insolvent (and for simplicity the asset becomes worthless).

  • For accountancy purposes, the lessor will write off the debtor balance(s) in respect of that lease.
  • For tax purposes, however, bad debt relief is restricted to unpaid rentals which have been recognised as rental income for tax purposes - to the extent that the write off represents future rental income not yet recognised for tax, no deduction is due in computing taxable trading profits before capital allowances.

The fact that the leased asset has become worthless will be reflected one way or another in the capital allowances computation (to the extent that the leased asset attracts capital allowances).