Finance Leasing Manual - FLM13.33

Tax treatment of sale: capital allowances

Section 46 Finance (No.2) Act 1997 restricts the capital allowances available to the lessor in a sale and lease-back of machinery or plant on or after 2 July 1997, see FLM6.50 onwards. The legislation impacts in two particular ways:

• it limits the allowances available to the lessor to the notional written down value of the items concerned; essentially the notional written down value is the amount that would still be available had the vendor/lessee claimed all possible writing down allowances up to the date of sale;

• for sale and lease-backs where the lessor does not take on sufficient risk it denies any allowances to the lessor.

To ensure that this legislation is applied in appropriate cases it is important for the lessee's Inspector to pass information about sale and leaseback transactions to the lessor's Inspector. There will be little means of identifying such transactions in the lessor's accounts. From the lessor's standpoint a sale and lease-back is accounted for in the same way as other finance leases.