Finance Leasing Manual - FLM43.10

Lessee becomes insolvent in first year

If the lessee becomes insolvent the lessor will repossess the leased assets and realise the goods as best it can. The proceeds will be a capital receipt to set against the original cost. Although in accounting terms the loss is shown as a loss arising in respect of a debtor, for tax purposes it is a capital matter. Any loss will be relieved under the Capital Allowances code. If, as is likely, the sale does not recoup the full cost (including finance charges due under lease) a claim may also be made for unpaid rentals as an ordinary creditor in the liquidation, and any recovery will be taxed as Schedule D Case I income.

If the asset in the example at FLM43.04 were to be sold for £30,000 and £10,000 is recovered from the lessee, the lessor's loss, ignoring interest, would be £10,000. The lessor will get capital allowances relief of £20,000 (£50,000 less £30,000) and is taxed on £10,000 rent as a Schedule D Case I trading receipt. The net loss for tax purposes is therefore also £10,000.