Tax avoidance was possible, pre- FA97/Sch 12, on leases of
real property because part of the lessor's 'interest' return was
taken in the form of a capital sum. Lessors argued that the capital
sum was outside the charge on property income (see
BLM70020). The 'interest' amounted to a
capital gain and was usually covered by indexation and other
reliefs.
The gross earnings in the commercial accounts under GAAP -
the 'interest' line at the bottom of the example at
BLM70035 - would be exactly the same for
both straightforward deferral leases and for income-into-capital
schemes (back-loaded rentals with a capital sum). The 'loan
repayment' element in the capital sum would just go straight to the
balance sheet to pay off the 'loan'.
