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HMRC internal manual

Capital Allowances Manual

PMA: Anti-avoidance: Finance leaseback: Lessor's income or profits: Computation of lessor's profits


There are rules in Section 228D about computing the lessor’s profits in a sale and leaseback case or a lease and leaseback case. They apply where the lease is a finance lease for the lessor.

In a sale and finance leaseback the lessor’s qualifying expenditure is limited to the restricted disposal value CA28910. This may be less than the price that the lessor actually pays. To take account of this you must calculate the permitted threshold. You should leave the amounts received under the sale and leaseback that are above the permitted threshold out of account. For example, if the permitted threshold is £8,000 and the lessor receives rents of £10,000 you should ignore £2,000 of the £10,000 because that is the amount of the rents that is above the permitted threshold.

The permitted threshold is the gross earnings plus the allowable proportion of the capital expenditure.

The gross earnings are the amount shown in the lessor’s accounts as the gross earnings under the leaseback.

The allowable proportion of the capital repayment is the expenditure qualifying for capital allowances spread over the length of the lease. It is given by this formula:

Restricted Disposal Value x Investment Reduction for Period divided by Net Investment.

Investment reduction for period is the amount shown in the lessor’s accounts in respect of the reduction of net investment in the leaseback.

Net investment is the amount shown in the lessor’s accounts as the lessor’s net investment in the leaseback at the beginning of its term.

If you have a lease and finance leaseback there is no capital repayment and so the permitted threshold is the gross earnings.

If the lessee assigned his, her or its interest under the lease before 17 March 2004 these rules do not apply and the lessor is taxable on the gross rents received.