Finance Leasing Manual - FLM26.21

'Income-into-capital' schemes pre-Schedule 12 FA1997

The reason for avoidance of tax being possible pre-Schedule 12 FA 1997 on leases of real property was that, where part of the lessor's 'interest' return was taken in the form of a capital sum, the lessors argued that it was outside the charge on income under Schedule A (see FLM26.06). The 'interest' amounted to a capital gain but it was covered by indexation and other reliefs.

The gross earnings in the commercial accounts under SSAP 21 - the 'interest' line at the bottom of the example at FLM26.12 - would be exactly the same for both straightforward deferral leases and for income-into-capital schemes (back-loaded rentals with a capital sum). The 'loan repayment' element in the capital sum would just go straight to the balance sheet to pay off the 'loan'.