Finance Leasing Manual - FLM29.07

Income-into-capital scheme: tax treatment: purchase option

In the example at FLM29.01 eventually Bank (the lessor) will be taxable on the gain arising when it sells the 999 years lease to the option-holder. This will be within the capital gains regime and in computing the taxable gain Bank can deduct the cost of the asset and indexation allowance on the cost. If there is any residual gain, capital losses are available to cover it. Assuming a rate of 4% a year, the effect of indexation allowance might look like this.

Bank (the lessor) is therefore getting indexation allowance to set against what is in substance interest. If it had made a normal loan it would not be able to do so. Also, Bank can use capital losses or roll-over reliefs which cannot normally be used for income.