Finance Leasing Manual - FLM12.23

No secondary period: assets with residual values: rebates to lessee

If there is provision for the lessee to get a rebate of rentals when the lease ends equal to the market value of the asset, correct accountancy (see FLM12.24) requires this 'residual value' to be taken into account in computing the depreciation charge. Although the rentals are still written off over the primary period only, the capital element is written off net of the estimated residual value of the asset. The trader writes off his expected net loss on the asset after deducting the expected sale proceeds. This enables a sensible answer to be reached for tax purposes. In these circumstances you should not accept that the lessee can write off the entire capital element of the rentals over the primary period simply because there are no secondary periods.