BLM41040 | Taxation of long funding leases: long funding operating lessors: lease terminates as expected; part 1 of 2

Example

Assume that the asset in the example in BLM41020 is sold for what turns out to be its market value of £7,000 at the end of year 15 and that nothing is paid to the lessee, even though the market value exceeds the expected value.

Step 1 is to find:

• the termination amount (TA, see BLM41050). In this case the asset is sold at the end of year 15. This sale would have been a disposal event had the lessor claimed capital allowances and it occurs as a result of (or in connection with) the termination of the lease. Therefore the termination amount (TA) is £7,000.

• the total of any sums paid to the lessee that are calculated by reference to the termination value (LP). The termination value is defined in CAA01/S70YH but as nothing was paid to the lessee, in this case LP is 0.

Step 2 is to find:

• the starting value for the purpose of CTA10/S363-365(SV). In this example it is £20,000.

• the total of the deductions allowable under CTA10/S363-365 (TD1). In this example it is 15 x £1,000 = £15,000.

• the amount (ERV) by which SV exceeds TD1. In this example it is £5,000.

Step 3 is to find:

• the amount of any additional expenditure for the purpose of CTA10/S366-368 (TAE). In this example it is £5,000.

• the total of the deductions allowable under CTA10/S366-368 (TD2). In this example it is 10 x £400 = £4,000.

• the amount (EAE) by which TAE (£5,000) exceeds TD2 (£4,000). In this example it is £1,000.

Step 4 is to:

Add ERV (£5,000) and EAE (£1,000) to give T. Here T is £6,000.

As (TA - LP) (£7,000) exceeds T (£6,000), the lessor is treated as making an additional profit of £1,000.

In summary the commercial position is:

The overall tax position is: