BLM71300 - Schedule 12 FA 1997:
'income-into-capital' schemes: example, part 1 of 5
Example
This example shows more detail of the practical effects of an
'income-into-capital' scheme. The following steps are agreed in
advance between the parties-a finance lessor which is part of a
major banking group (Bank) and a finance lessee (the Borrower):
- Borrower owns a property freehold and
grants a 999 years lease to Bank for £70 million. No rent is
payable under this lease. That £70 million is the 'loan'.
- Bank's funding cost (interest payable by
Bank) is £9 million a year.
- Bank leases the property back to Borrower
for 30 years in return for rent. The rent is low until the end of
year 7 of the lease when it increases so that the rents over the
remainder of the lease will repay the 'loan' with 'interest'. The
first seven years' rent amounts to £40 million.
- Bank grants an option to a subsidiary of
Borrower called Holder: this is the company that holds the option
to buy back the leased asset. The option enables Holder to acquire
the 999 years lease from Bank after 7 years for £100
million.
The important point here is that, if the option is exercised,
Bank will get its money in two ways; first, as rent under the lease
(£40 million) and, second, as proceeds of sale when Holder
exercises its option (for £100 million) - this amounts to
£140 million in total. In this way, Bank gets back the
£70 million spent on acquiring the 999 years lease and
£70 million representing 'interest'.
