BLM51015 | Right-of-use assets: right-of-use asset lessees: taxation of right-of-use asset lessees: example

The example below relates to a property lease

Trading Ltd enters into a property lease on the 1 January 2019. It draws up its accounts to the 31 December 2019 and uses IFRS accounting framework and therefore uses IFRS 16 in its accounts.

The property lease is for 10 years and it is concluded that the lessee will not extend the lease beyond that period. A lease premium is paid of £10,000. The lease liability is calculated as £100,000 with the interest rate implicit in the lease being 5%. The actual cash rental per year is £12,950. The lessee estimates that at the end of the lease it will need to incur £5,000 returning the property to its original condition.

The initial recognition will be a lease liability of £100,000 and a right-of-use asset of £115,000 (ignoring discounting).

The right-of-use asset is depreciated on a straight line basis over the life of the lease. For the period to 31 December 2019 the lessee recognises £11,500 for the depreciation of the right-of-use asset and an interest expense of £5,000.

The lease premium is capital on first principles but the lessee is deemed to incur a revenue expense under section 63 CTA 2009 (Guidance on lease premium deductions is at BIM46255). The lease premium is split between £1,800 capital expenditure and £8,200 revenue expenditure.

Based upon the original costs of renovation at the start of the tenancy the lessee estimates that 50% of the costs of restoring the property at the end of the lease will be capital costs. Guidance on the treatment of dilapidation costs, the costs of restoring a property to its original condition, is given at BIM43250. The total capital dilapidation expense is therefore £2,500 over the life of the lease.

The relevant profit and loss debits and the tax adjustments are shown in the following table.