Finance Leasing Manual - FLM12.76
Sale by lessor: payments made to lessee
When the lessee no longer wants the use of the leased asset, the
lease agreement is likely to provide that the lessee sells the
asset as agent for the lessor. Although legal ownership rests with
the lessor - and the lessor will receive the sale proceeds -
economically speaking the leased asset is 'owned' by the lessee. If
the asset is sold it is reasonable to expect that substantially all
of the benefit of the sale proceeds ends up with the lessee.
If the lease is terminated during the secondary lease period
the lessee will receive, from the lessor, a terminal rebate of rent
representing substantially all of the sale proceeds. If the sale
occurs during the primary lease period the sale proceeds will be
set against the outstanding liabilities under the lease. This may
result in the lessee paying the lessor a terminal rental, or the
lessor paying the lessee a terminal rebate.
Where the lessee receives a terminal rebate the issues to be
addressed considered under the following headings:
- the character of the receipt - see FLM12.79 onwards;
- adjustments needed for tax purposes - see FLM12.83 onwards;
- special problems if SP3/91 does not apply - see FLM12.86 onwards.
The tax treatment of terminal rentals paid by the lessee is considered at FLM11.31 onwards.
