BLM41005 - Taxation of long funding leases: long funding operating lessors: introduction

The basic rules for taxing lessors under long funding operating leases are set out in ICTA88/S502E.

Where plant or machinery is leased out under a long funding operating lease then, to reflect the lack of capital allowances, the lessor’s income is reduced by an amount that is established at commencement.

In outline, the deduction is the amount by which the asset is expected to fall in value over the term of the lease, apportioned on a time basis to each period of account over the term of the lease. The deduction for each period is referred to as the ‘periodic deduction’.

The periodic deduction is based on

• the ‘relevant value’ (often cost, but see BLM41010), less
• the amount, which at the commencement of the term of the lease, is expected to be the residual value of the plant or machinery.

The residual value is the estimated market value of the plant or machinery if it were disposed of at the end of the lease, less the estimated costs of disposal (ICTA88/S502L (2)).

The resulting value is referred to as the gross reduction over the term of the lease and this is apportioned on a time basis over that period.

See BLM41015 for an example.