TTM10110 - Ship Leasing: Defeased leasing
As the owner of the leased asset, a finance lessor is normally entitled to claim capital allowances in respect of capital expenditure incurred in acquiring the asset.
However, a finance lessor will not be entitled to any capital allowances in respect of capital expenditure incurred on a qualifying ship provided to a tonnage tax company if the lease is defeased.
A lease will be regarded as defeased for this purpose if the leasing arrangements include provisions which have the effect of removing the whole (or the greater part) of any non-compliance risk which would otherwise fall (directly or indirectly) on the lessor.
For this purpose:
- A ‘non-compliance risk’ means a risk that a loss will be sustained by any person if payments under the lease are not made in accordance with its terms.
- The lessor and any persons connected with him are treated as the same person (and ‘connected person’ has the meaning given in ICTA/S839).
In practice, we regard ‘the greater part’ of the risk as having been removed if more than 50% of the risk has been removed by the defeasance arrangements
Excepted forms of security
When considering the extent of the lessor’s non-compliance risk for this purpose, certain forms of security may be disregarded. These are known as ‘excepted forms of security’, and they consist of:
- certain parental or third party guarantees (see TTM10120), and
- certain forms of security derived from the ship itself (see TTM10130).
There is no limit to the amount of ‘excepted security’ that can be provided in respect of a finance lease of a qualifying ship to a tonnage tax company.
FA00/SCH22/PARA90 (defeased leasing)
FA00/SCH22/PARA91 (excepted forms of security)