Finance Leasing Manual - FLM20.01

Provisions under which lessors are taxed: introduction

For tax purposes, a finance lease - in accordance with the legal form of the transaction - is regarded as the hiring of an asset. Rentals are wholly revenue items - no part is regarded as the repayment of a loan. Rental rebates are wholly revenue items. An exception is if, in the case of machinery and plant, there is an option for the lessee to buy the asset.

A lessor's income may be charged at present under one of the following headings:

• Schedule A: this applies where real property in the UK is leased (rents from overseas property are chargeable under Case V of Schedule D) - there are two different ways of measuring Schedule A income, see FLM21.03

• Case I of Schedule D: this applies where chattels are leased and a trade is carried on, see FLM21.10

• Case V of Schedule D: this applies to trades which are carried on wholly abroad and to real property leasing where the asset is not in the UK - there are two different ways of measuring Case V charges, as there are for Schedule A

• Case VI of Schedule D: this applies to a lease within the UK which doesn't amount to a trade.