Finance Leasing Manual - FLM35.09

Capital allowances: disposal proceeds less than cost of asset: example

Take a very simple example. A leased asset, cost £1000, generates in year 1 accountancy rental earnings of £120, normal rents (actually received in the year) of £100 and therefore cumulative accountancy rental excess carried forward of £20. At the beginning of year 2 the lease is terminated and the asset is sold.

• If the asset is sold for less than cost, say, £990 the lessor will suffer a bad debt and will obtain relief under the Case I rules (also applied for Schedule A by Paragraph 8) to the extent that the bad debt deduction in the accounts (£1020 - £990 = £30) has been brought into account for tax (that is £100 - £120 = £20).

• So overall the lessor is taxed only on £100 of rent received (and gets relief for the £10 loss on the sale of the asset through the capital allowances computation).

• To complete the picture the cumulative accountancy rental excess of £20 would be reduced to nil under Paragraph 9(4).

If instead the asset is sold for more than cost, say £1030, the excess of the sale proceeds over cost will be excluded from the capital allowances computation under the normal rules and cumulative accountancy rental excess is set against the disposal proceeds for capital gains tax under Paragraph 12 Schedule 12 FA 1997.