Finance Leasing Manual - FLM6.54

Avoiding capital allowances balancing adjustments: example

If the kit cost £10m and the lessor claimed £10m of capital allowances, a sale back for £10m (plus interest) would generate a capital allowances recovery of £10m. Before the enactment of FA97/S82 and FA97/SCH12 (see FLM27.01 onwards) this balancing charge was avoided if, for example:

• the lessor acquired the asset via a 100% special purpose subsidiary company which did nothing else; and the lessor sold the shares in the company containing the asset to the lessee for the capital sum when the time came; or

• at the outset the lessor acquired a 999 year lease of the asset for a capital sum equal to the desired 'loan'; and subsequently the lessor granted a sub-lease for 998 years back to the lessee (or, more usually an associate of the lessee) for the capital sum plus the outstanding interest - for all practical purposes a 998 year lease is as good as a 999 year lease; once the 998 year lease had been granted, the lessor's residual interest in the 999 year lease was worth nothing and could be sold a year or two later to another associate of the lessee for a nominal sum, leaving the lessee with the entire interest.