In the example in
BLM30040 the finance lessor is taxable
(like the bank) on a profit of £20 at the end of the day, but
the 25% capital allowances of £250 due to the lessor in Year 1
will create an upfront tax loss of £76. This is on a
simplified calculation which assumes:
This produces the following computation for the finance lessor for Year 1:
| Gross rents receivable (£1,200 ÷ 5) | £240 |
| Less interest payable | £58 |
| Gross profit | £182 |
| Less other expenses | £8 |
| Net profit | £174 |
| Less capital allowances | £250 |
| Tax loss | (£76)
|
The loss is recovered later and the overall profit of £20 is taxed, as the following tax computations for the finance lessor for the whole five years shows:
|
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Totals |
| Gross rent | 240 | 240 | 240 | 240 | 240 | 1,200 |
| Less interest payable | 58 | 45 | 32 | 19 | 6 | 160 |
| Gross profit | 182 | 195 | 208 | 221 | 234 | 1,040 |
| Less other expenses | 8 | 4 | 4 | 4 | 0 | 20 |
| Net profit | 174 | 191 | 204 | 217 | 234 | 1,020 |
| Less WDA and BA | 250 | 188 | 141 | 105 | 317 | 1,000 |
| Taxable profit (loss) | (76) | 4 | 64 | 112 | (83) | 20 |
The capital allowances for Year 5 assume a short-life
election has been made and a balancing allowance is due on the
worthless asset, thereby relieving the entire net cost over the 5
years.
With longer leases there are likely to be tax losses in the
first few years. For example if the lease is over a 25-year term
there could be tax losses in the first 6 or 7 years. Tax losses may
be generated for longer periods by structuring the payment profile
appropriately. The longer the period of losses, and the greater the
delay in recovering the tax, the greater the timing advantage.
