BLM71320 - Schedule 12 FA 1997: 'income-into-capital' schemes: effect of Part I FA97/Sch 12, part 5 of 5
Example
In the example at
BLM71300, the Holder of the option
acquires the 999 years lease from Bank on 31 March 1998 for
£100 million.
Lessor
Post 26 November 1996, the minimum taxable earnings of the
lessor is the accountancy rental earnings. For example, suppose
Year 8 all fell after 26 November 1996, the lessor would be charged
on earnings of £13 million instead of £8 million. Nothing
is done about earnings which escaped being accrued before 26
November 1996.
Lessee
The amount of rent payable is calculated in accordance with a
Cash Flow which is based on certain assumptions designed to
maintain the after-tax profit margin agreed between Bank and
Borrower. Under the terms of the lease, adjustments are made to the
rents and capital sums if after-tax profit margin agreed between
Bank and Borrower is prejudiced. This may happen, for example,
if:
- tax is charged on more than just rent; or
- Bank is not entitled to Capital Allowances; or
- the law is changed relating to payments received by Bank from any person in connection with the transaction.
The aim of the adjustment is usually to leave the Bank with the same net margin. How soon the adjustments take effect in terms of rental changes depends on the precise terms of the lease and option agreement. But the effect of such an adjustment is that Borrower has to pay the extra tax charged on Bank.
