In the example at
BLM71010 there is not a loan in legal
terms but the net result is the same. The Borrower gets £10
million by parting with their property at the outset and repays the
£10m with 'interest' in Year 10. Ignoring tax and any modest
actual rent, the interest on a £10 million loan compounded at
10% for ten years at annual rests is £16 million. So the lump
sum the lender has to pay under the option is £26 million. In
practice, the bank would charge less than £26 million because
of the tax savings on the £16 million 'interest' turn. Only a
single sum would be paid by the Borrower - the 'interest' element
is not identified separately.
There may also be an added benefit to the Bank from capital
allowances. In the example given above capital allowances might
have been given on £10 million - perhaps £9 plus million
if 25% writing-down allowances applied by the time the option is
exercised. But the net cost to the Bank is nil because it
effectively recovers the £10 million cost.
