The availability (or not) of capital allowances to a lessor
is often crucial to a business in deciding whether to enter into a
lease, particularly a finance lease, but also in the case of some
operating leases, especially where the lease is used to provide off
balance sheet finance.
Prior to FA 2006 any plant or machinery allowances due
normally went to the legal owner of the asset (the lessor). The
benefits that could arise from capital allowances are described at
BLM00700 onwards, but in broad terms
their effect is to reduce what amounts to the cost of borrowing.
That is the ‘interest element’ of finance lease rentals
for an asset costing a particular amount could be less than the
interest payable on a loan for the same amount.
This benefit often affected the decision on whether to buy or
lease an asset. This distortion of business decisions was addressed
in FA 2006 with the introduction of a new regime for taxing long
funding leases of plant or machinery. These rules move the right to
capital allowances from lessor to lessee, thus removing the benefit
previously enjoyed by lessors where the lease is a long funding
lease.
In some circumstances, particularly where the asset had a
short economic life, lessors actually suffered a disadvantage if
they needed to claim capital allowances, see
BLM30235.
BLM20000 gives more background on the
reasons for introducing the regime for taxing long funding leases
of plant or machinery.
Note that if the lessee incurs capital expenditure and there
is a purchase option in a lease of plant or machinery the capital
allowances may (but may not) go the lessee, see
BLM00325 onwards.
