Commentary

B5.401 Leases—overview

Business tax
Business tax | Commentary

B5.401 Leases—overview

Business tax | Commentary

Division B5.4     Leases

For updates affecting this Division please see Part B0 Updates

Background to leases

B5.401 Leases—overview

A lease is an agreement under which one person (the 'lessor') gives possession and use of an asset to another (the 'lessee') over an agreed period of time on payment of rentals or other consideration1. A lessor's income usually arises from the leasing of land or buildings, plant or machinery, or intangible assets such as software. Income arising from the leasing of land is taxed as property income (see Part B6), but in the case of other types of asset, the vast majority of such activity amounts to trading. In either case, the method of computing the profits is broadly similar. There are a number of different types of lease structure, outlined below. Depending on the type of lease, either the lessor or the lessee may be entitled to claim capital allowances on the leased asset. This division does not cover capital allowances on leasing, for which see Division B3.3. This division is concerned mainly with the tax treatment of lease rental payments for both the lessor and the lessee.

HMRC cover leasing in some detail in their Business Leasing Manual, with some further comment on the tax treatment of leases in their Business Income Manual2.

Operating leases

In practical terms an operating lease is the type of lease where the hire period of the asset is shorter than its likely useful life, for example the hiring of a van for a week3. The

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