Commentary

B5.407 Lessors under long funding operating leases

Business tax
Business tax | Commentary

B5.407 Lessors under long funding operating leases

Business tax | Commentary

B5.407 Lessors under long funding operating leases

The following amounts are brought into account when determining the profits of a person carrying on a trade in any period (either in whole or in part) in which he is the lessor of any plant or machinery under a long funding lease which is a long funding operating lease (see B5.405).

Periodic deduction

Because lessors are not entitled to capital allowances in respect of the leased plant, the lessor under a long funding operating lease is entitled to a deduction for the amount by which the plant is expected to fall in value over the term of the lease, apportioned on a time basis to each period of account over the term of the lease. These are called 'periodic deductions'1.

The deductions are computed as follows2:

  1.  

    (1)     Find the starting value (see below)

  2.  

    (2)     From the starting value deduct the 'residual value'3, ie the amount which (at the commencement of the lease) is the estimated market value on disposal at the end of the lease less estimated costs of disposal.

  3.  

    The result is called 'the expected gross reduction in value over the term of the lease'4.

  4.  

    (3)     Apportion the expected gross reduction in value over the term of the lease on a time basis over each period of account which includes any part of the term of the lease5

  5.  

    (4)     The deduction for any period of account is the amount so apportioned6

The 'starting value' is determined in accordance with the following table7:

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