Finance Leasing Manual - FLM12.79

Terminal rebate: finance leases: character of the receipt

A terminal rebate is normally a revenue trading receipt. Although the lease itself is a capital asset (see RTZ Oil & Gas v Elliss, 61TC at 172), and sums received (or paid) on the disposal of a capital asset are normally capital (see for example Mallett v Staveley Iron & Coal Co., 13TC772), that does not make the rebates received by the lessee capital in nature. It is necessary to analyse the transaction in its commercial context.

Under a finance lease the rentals payable are from the outset provisional, to be revised when the lease is terminated. This is achieved either by a rebate or, conceivably, by a further payment of rent. It is impossible therefore to distinguish the character of the rebate from the rentals themselves. In contrast in cases like Staveley the sums paid to terminate leases were in no sense an increase in rents for past periods.