This legislation applies for corporation tax. It does not apply
in income tax cases.
A company with a business of leasing plant may dispose of
leased assets but keep the rights to all or part of the income from
them. When this happens the normal rules about disposal value
CA23250 do not apply.
The disposal value is the disposal proceeds plus the value of
the rentals it keeps. The value of the rentals it keeps is called
the net present value of the rentals.
Normally there is a limit on disposal value CA23250. It is
limited to the qualifying expenditure incurred on the provision of
an asset by the person bringing the disposal value to account. This
limit does
not apply where:
In a case like that the whole amount received is brought to
account as a disposal value even if it is more than the qualifying
expenditure incurred on the asset.
If the disposal proceeds are less than the qualifying
expenditure the limit applies even if the disposal value, that is
the disposal proceeds plus the value of the rentals kept, is more
than the qualifying expenditure. In a case like that only part of
the value of the rentals kept will be included in the disposal
value.
Example
Highway 61 Leasing Ltd has a business of leasing plant and
machinery. It bought a helicopter for £50 million. It leases
it to Grossman Plc for an annual rent of £500,000 on a 10-year
lease. After two years it sells the helicopter for £48 million
plus half the future rents. The value of the future rents it will
receive is £3,500,000. The disposal value is £51,500,000
(£48 million + £3,500,000) but it is restricted to
£50 million, the expenditure incurred, because the disposal
proceeds of £48 million are less than the qualifying
expenditure of £50 million.
If the sale price of the helicopter had been £51 million
the full £54,500,000 (disposal proceeds £51 million +
value of future rents £3,500,000) would have been brought to
account as disposal value because the disposal proceeds of £51
million are more than the qualifying expenditure of £50
million.
If rentals are brought to account as disposal value do not
treat them as income. Make any apportionment that you need to make
on a just basis.
If plant is leased along with other assets like land
apportion the net present value of the rentals on a just basis to
find the value of the rentals under the lease relating to the
plant.
This is how you calculate the net present value of rentals. It
will always be less than the actual rentals due.
For each rental payment start with the rental payments
payable after the disposal, that is the rental payments the seller
will receive after the disposal.
Then calculate the number of days in the period between the
date of disposal and the payment date.
Divide that rental payment by 1 plus the temporal discount
rate to this power. The power is the number of days in the period
divided by 365.
The temporal discount rate is 3.5%. The Treasury may change
this by regulations.
The result is the net present value of the payment.
You then add all of the net present values together to get
the net present value of the rentals.
Example
Dylan Plc leases a space shuttle to Coconut Airways for an
annual rent of £2 million payable on 1 January each year. He
gets bored with leasing the shuttle and so he sells it to Garcia
Ltd. on 1 July 2008 for £100 million plus 50% of the future
rents. Dylan Plc’s disposal value is £100 million plus
the net present value of the rentals.
This is the net present value of the rental of £I
million that Dylan Plc receives on 1 January 2009.
The number of days in the period from the disposal date to
the payment date is 184. Divide the rental payment of £1
million by (1 + 3.5%) to the power 184/365. So the figure by which
the rental of £1 million should be divided is 1.1676256.
This means that the net present value of the rental of
£1 million due on 1 January 2009 is £855,145.
Dylan Plc (or its accountants) has to do this for each rental
Dylan Plc is due to receive after the disposal. It then adds them
together to get the net present value of the rentals. This is added
to the disposal proceeds of £1 million to get the disposal
value.
