Long funding leases

By Tolley in association with Martin Wilson, the Capital Allowances Partnership Limited

The following Corporation Tax guidance note by Tolley in association with Martin Wilson, the Capital Allowances Partnership Limited provides comprehensive and up to date tax information covering:

  • Long funding leases
  • Background
  • The relief
  • Definitions
  • Entitlement
  • Quantification of expenditure
  • Disposals
  • Background plant or machinery
  • Plant leased with land of a low percentage value
  • Transfers of leased assets
  • Sale and finance lease backs
  • Anti-avoidance ― sale and leaseback
  • Accounting treatment


FA 2006, Sch 8 introduced a new regime for dealing with leased plant and machinery. The commencement provisions are complex, but in most cases these ‘long funding lease’ rules will apply to leases finalised on or after 1 April 2006.

FA 2006, Sch 8, paras 15–27

The most significant feature of the rules is that, provided certain conditions are met, capital allowances are available to the lessee rather than the lessor. However, there are extensive exceptions to the long funding lease rules, notably affecting fixtures and other plant included in, or sold with, property.

A lessee does not have to come within the new regime if he does not want to, but can instead claim a deduction for lease rentals in the usual way.

CAA 2001, s 70G

There is provision for a lessor to elect that all new leases entered into by it shall be treated as long funding leases (if they would not otherwise be so). This does not apply to leases of cars or of assets which cost more than £10m.

FA 2006, Sch 8, para 16; SI 2007/304 (subscription sensitive)
The relief

Where a lease of plant and machinery is treated as a long funding lease, the lessee will claim capital allowances instead of obtaining a tax deduction for lease payments. See the Writing down allowances on the main pool guidance note for details of the rates of allowances. Whether or not this is advantageous will depend on the rates of allowances available, compared to the payment profile set out in the lease agreement. The lessee can also deduct the proportion of any rental payments he makes to the lessor that are deemed to relate to the financing costs of acquiring the asset (ie the interest expense suffered on the loan provided by the lessor). This will be

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