BLM41045 | Taxation of long funding leases: long funding operating lessors: lease terminates early, part 2 of 2

Example

Assume that the asset in the example in BLM41020 is destroyed after 5 years and that no additional expenditure is incurred. The insurance proceeds are only £8,000. The lessor pays nothing to the lessee and the lease is terminated.

Step 1 is to find:

• the termination amount (see BLM41050). In this case the asset is destroyed and insurance proceeds of £8,000 are received. The destruction of the asset would have been a disposal event had the lessor claimed capital allowances and the lease terminates as a consequence. Therefore the termination amount (TA) is £8,000.

• 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 5 x £1,000 = £5,000.

• the amount (ERV) by which SV exceeds TD1. In this example it is £15,000.

Step 3 is to find:

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

• the total of the deductions allowable under CTA10/S366-368 (TD2). In this example it is nil.

• the amount (EAE) by which TAE (nil) exceeds TD2 (nil). In this example it is £nil.

Step 4 is to:

Add ERV (£15,000) and EAE (nil) to give T. Here T is £15,000.

As (TA - LP) (£8,000 - 0) is less than T (£15,000), the lessor is treated as incurring an additional loss of £7,000.

In summary the commercial position is:

And the overall tax position is: