Finance Leasing Manual - FLM11.59

Non-depreciating assets

Finance leases may also be written for assets, such as buildings in Enterprise Zones qualifying for a 100 per cent initial allowance - see CA1420 onwards - which are not likely to lose value at all over the life of the lease (including any secondary or later periods). If it is prudent to do so, the rights in such a leased asset will not be depreciated in the lessee's accounts drawn up under SSAP 21.

Effectively, the accounting treatment assumes that the lessee will consume none of the value of the asset during the period he uses it, and that the prospective rental rebate provided for in the lease will not be less than the non-finance charge element of the rentals. In short, the asset is expected to hold its value, so no depreciation charge is necessary and only the finance charge element in the rentals is charged in the profit and loss account over the period of the lease. You should resist any attempt to make a deduction for the non-finance charge element in the lessee's Schedule D Case I computations.

If the rebate made to the lessee turns out to be less than the total non-finance charge element in rentals paid, the difference will be deductible on termination of the lease.

If, in accordance with correct accountancy principles, the asset starts to be depreciated during the lease term a deduction for lease rent equal to the amount of the depreciation can be given for tax purposes.