BLM70035 - Schedule 12 FA 1997: introduction to back-loaded leases: worked example of commercial and tax profits pre FA97/Sch12

Example

The practical effect of the tax treatment before FA97/Sch 12 is clearly seen in an over- simplified FA97/Sch12/Part II finance lease example. Suppose:

• there is a 3 year finance lease of a real property asset,
• the total rentals due are £900,
• the total interest element in those rents is £120,
• the total capital element in those rentals is £780, and
• the rentals due for each of the three years are, respectively, nil, £300 and £600.

Commercial accounts treatment

*This is the top line in the table in BLM70030

The total gross commercial earnings are the 'interest' element of £120:

• £90 is earned in Year 1,
• £30 is earned in Year 2, and
• there are no commercial earnings in Year 3 in this case.

In practice, rentals are usually payable monthly or quarterly in advance. The gross commercial earnings would be spread over the three years. The figures in the example are over-simplified to illustrate the principle.

Depreciation

In finance leasing circles the second line in the account is normally called 'depreciation'. In this example there are total deductions from the rents due of £870 (in Years 2 and 3). There is an addition of £90 in Year 1. Setting this off against the £870 deductions for Years 2 and 3 produces £780, which is the capital element in the gross rentals (the 'loan repayment').