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HMRC internal manual

Capital Allowances Manual

PMA: Anti-avoidance: Outline of legislation and meaning of finance lease


There are special rules for plant and machinery acquired for leasing out under a finance lease.

First, the expenditure that qualifies for capital allowances is time apportioned in the first year CA28450. This counters the use of finance leases to accelerate the benefit of capital allowances on the leased asset.

Second, where the asset has been sold and leased back under a finance lease, the amount on which allowances are given is limited to the notional written down value to the seller. The disposal value to the seller is also limited to the same amount. In addition there are no first- year allowances CA28550.

Third, where the asset has been sold and leased back under arrangements that remove the greater part of the risk that the lessee will not meet its obligations under the lease, no allowances are given to the lessor CA28600. This can happen for example when the lease is on defeased terms. Defeasance is a term used to describe arrangements where a third party takes over the lessee’s obligations to pay rentals in return for a lump sum payment, or guarantees rentals in return for a dedicated cash deposit that the lessee can only withdraw to pay them.

The latter two rules counter arrangements to transfer the benefit of unused allowances to a finance lessor.

A finance lease is an arrangement or arrangements that under normal accountancy practice in the UK would fall to be treated as a finance lease or a loan in the accounts or consolidated accounts of the lessor or any person connected with the lessor. Normal UK accountancy practice is set out in Statement of Standard Accounting Practice SSAP21 ‘Accounting for leases and hire purchase contracts’ (seeBIM61030). The reference to normal UK accountancy practice is there in order to apply the normal accounting practice applicable to a company incorporated in the UK, that is Generally Accepted Accounting Practice in the UK, to the accounts of the lessor and persons connected with the lessor. It does not impose any requirement that either the lessor or any of the persons connected with the lessor is a company incorporated in the UK.

There is one exception to this definition. Arrangements that are a long funding lease for the lessor are not a finance lease.