Finance Leasing Manual - FLM25.10

Back-loaded leases: tax treatment

The application of SSAP 21 (see FLM25.09) produces the correct 'interest' earnings for the year but, because the rentals are back-loaded, there is either no rental due to the lessor for the period or, more usually, the amount due is less than the SSAP 21 'interest' earnings.

Before Schedule 12 FA 1997 was enacted, lessors argued that they were only liable on the rents payable. This was correct in the case of real property leases because the statutory old Schedule A régime taxed the rentals to which the lessor was 'entitled'. But the position for rentals taxable under Schedule D Case I was less clear.

The same issues arise for the Schedule 12 Part I 'income-into-capital' schemes because:

• at the extreme) there never is any taxable income because the return is the capital gain element in the capital sum (which may be covered by indexation relief); or

• the payment of a capital sum arises before the cumulative rental payments exceed cumulative commercial 'interest' earnings, as rentals are stepped upwards.