Finance Leasing Manual - FLM43.04

Bad debts deduction: example

In order to consider the various possibilities it is helpful to look at a practical example. Assume that the 'capital value' of the lease is £50,000 and that this is repaid by three annual rentals of £20,000 paid in arrear. Ignoring any tax or other breaks that might be built into the lease terms, this gives an implied interest rate of 9.7% and the following profile.

Profile

Were this lease to run its full course, the lessor would be taxed on rental income of £20,000 for each of years 1, 2 and 3 (total rentals taxed £60,000) and relief of £50,000 would be given by way of the Capital Allowances code. So, overall, the lessor is taxed on £10,000 (rents £60,000 less CAs £50,000), but the method of taxation is very different to the accounting treatment.

The following paragraphs consider the consequences if the lease does not run its full course: