BLM20115 - Defining long funding leases: basic definition: no requirement for symmetry between the parties and rules applying to lessees (CAA01/S70 (4))

The tests for a long funding lease are carried out independently by lessors and lessees. So a long funding lease for a lessor may not be a long funding lease for the corresponding lessee.

If a lessor owns an asset and leases it out under a lease that is not a long funding lease the lessor will be entitled to capital allowances in the normal way. Without further action this would enable both lessor and lessee to obtain capital allowances as it would be very easy to arrange for the lessor to treat the lease correctly as a lease that is not a long funding lease and for the lessee to treat the lease correctly as a long funding lease.

Therefore there are rules in CAA01/S70Q which prevent two claims to capital allowances on the same asset. Priority is given to the lessor, so if the lessor can claim capital allowances (or could if it was within the charge to tax) no lessee can do so. The rules also apply to chains of leases (head lease, sub-lease, sub-sub-lease and so on). Guidance on these rules is at CA23820.

In addition, there are rules in CAA01/S70H that mean that, in the hands of a lessee, a lease is only a long funding lease if it makes a return for the ‘initial period’ – see BLM20120 – on the basis that the lease should be taxed as a long funding lease. This allows lessees to stay outside the long funding lease regime if they wish.

If the lessee chooses not to treat the lease as a long funding lease it may claim a deduction for lease rentals in the normal way, see BLM20120. Once a lessee has made a return on the basis that a lease is not a long funding lease, then that establishes the nature of the lease in the lessee’s hands. A lessee can change its mind within the period allowed for amending a return, but it is otherwise bound by the treatment adopted in its returns.