Another feature of 'income-into-capital' schemes is that the
full 'capital' element in the rentals is often not taxed, as it
should be in the normal case. Taxation of the full rentals is
necessary to balance the availability of capital allowances to the
lessor. But in these schemes the capital element (or some of it)
comes in the lump sum paid by the lessee under the option to buy
the asset and is not taxed at all.
In the ordinary way the capital allowances disposal
computation when the asset is sold should ensure that the lessor
only gets relief for the net depreciation of the asset. For
example, if a lessor buys an asset for £1m, capital allowances
will be due on £1m; but if the asset is later sold for
£1m the allowances are all clawed back. But under
'income-into-capital' schemes lessors often side-step the capital
allowances balancing adjustments by selling something which is in
substance the asset but is technically something else.
Example: Parent Bank sets up a special purpose
leasing subsidiary for a deal. The subsidiary buys the asset and
leases it to the lessee. When the 'loan' comes to be repaid the
bank sells the shares in its leasing company to the lessee's parent
instead of the leasing company selling the asset to the lessee. The
price for the shares will, of course, be the amount needed to repay
the loan with interest. There is a capital gain but it will likely
be eliminated or reduced by indexation etc. In practical terms for
both the lessor and lessee groups of companies it is just the same
as if the asset itself had been sold.
