Finance Leasing Manual - FLM27.05

Part I Schedule 12: 'income-into-capital' schemes

Part I schemes involve variations on the following arrangements:

• rentals under the finance lease are set low in the early years of the lease

• at the end of the desired loan period (say 5 or 10 years) the lessee has an option to buy the asset for a capital sum - that sum is calculated to be the amount needed to pay off the balance of the 'loan' with 'interest' after allowing for the (low) actual rents paid already.

In the commercial accounts the lessor recognises the 'interest' earned each year up to the option date, even where it has not been received (or receivable) and even though it may be paid in a capital form. For tax purposes the 'interest' in the capital sum may be a capital gain but any actual tax may be avoided or reduced because of the indexation relief and other capital gains reliefs.