Finance Leasing Manual - FLM26.02

Back-loaded leases: tax deferral and avoidance schemes

In the straightforward back-loaded leases (negative depreciation leases, as they were sometimes known), the finance lessor wants to recognise for tax the gross rents (the 'interest' and 'loan repayment' elements) for the period for which they are payable in accordance with the lease, regardless of their treatment in its commercial accounts.

In the more aggressive 'income-into-capital' schemes the finance lessor also sought to avoid tax altogether on some of his 'interest' earnings and to escape capital allowances disposal adjustments. When part of the lessor's return takes the form of a capital sum, the taxable earnings will always be correspondingly smaller than the accounts earnings.