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HMRC internal manual

Business Leasing Manual

Sale of lessor companies and similar arrangements: anti-avoidance: example showing effect of section 435 CTA2010

Section 435 CTA2010

The arrangement:

  • A Ltd owns lessor company B Ltd.
  • B Ltd owns a ship that is subject to a finance lease.
  • X Ltd, an unrelated company, makes a limited recourse loan to B Ltd. The terms of the loan are such that B Ltd is only required to make repayments of principal and interest on the loan out of its receipts under the terms of the lease. As a consequence of this arrangement B Ltd is no longer exposed to the risks and rewards of the lease. Instead X Ltd takes on all the risks and rewards. If the lessee fails to pay lease rentals to B Ltd it is X Ltd that will suffer as a consequence.
  • The terms of the loan mean that, following generally accepted accounting practice, B Ltd will stop recognizing the lease on its balance sheet and the net investment in the lease disappears.
  • B Ltd is then sold to X Ltd which should, in principle, trigger a charge and relief under the sale of lessor company legislation.
  • If the ship is the only plant or machinery asset owned by B Ltd then, without section 435, there would be no charge under the sale of lessor company legislation because no amount is shown as a net investment in the lease. The formula PM - TWDV will give a negative result leading to a nil charge.

However, there is a reduction in the amount shown in the balance sheet of the company in respect of the plant or machinery. The loan is an ‘arrangement’ and one of the main purposes of entering into the arrangement was to secure a relevant tax advantage - the reduction or elimination of the charge under the sale of lessor company legislation. Section 435 applies and the reduction in the amount on the balance sheet is ignored in calculating the amount of the charge.