BLM22020 - Defining long funding leases: amendments, transfers and assignments: extension of term of long funding operating lease (CAA01/S70YB)

The taxation of a long funding operating lease depends, among other things, on estimating the market value of the asset at the end of the lease term. If the term of the lease is extended beyond the original term the market value will change and it is necessary to cater for that ( BLM41025). Furthermore, without further provision the extension might create a new lease that was not treated as a long funding lease – thus potentially switching the right to claim capital allowances from lessee to lessor. CAA01/S70YB ensures this is not the case.

For the purpose of CAA01/S70YB, an event extends the term of a lease if

• it has the effect of making a further period non-cancellable,
• it is the grant of an option to the lessee to continue to lease the plant or machinery for a further period, where it is reasonably certain at the time the option is granted that the lessee will exercise it,
• it is the exercise by the lessee of an option to continue to lease the plant or machinery for a further period,
• it does not fall within the preceding paragraphs, but it has the effect that the lessee will continue, or is reasonably certain to continue, to lease the plant or machinery for a further period.

Where there is an extension, the existing lease is treated as terminating and a new lease as entered into on the ‘effective date’. The new lease is treated as a long funding operating lease (CAA01/S70YB (4))

The ‘effective date’ is the earlier of

• the day after the end of the original term, and
• if the rentals payable are varied as a result of or otherwise in connection with the event, the date on which the variation takes effect

See BLM41030 for an example.

These rules do not apply where the accountancy classification changes to a finance lease. In that case the rules in CAA01/S70YA apply, BLM22070.