Long funding leases

Produced by Tolley in association with Martin Wilson and Steven Bone

The following Owner-Managed Businesses guidance note Produced by Tolley in association with Martin Wilson and Steven Bone provides comprehensive and up to date tax information covering:

  • Long funding leases
  • Background
  • Relief for long funding leases
  • Definition of long funding leases
  • Entitlement to capital allowances on long funding leases
  • Expenditure on long funding leases
  • Disposals of long funding leases
  • Background plant or machinery
  • Plant leased with land of a low percentage value
  • Transfers of leased assets
  • More...

Long funding leases


The concept underlying the capital allowances treatment of a long funding finance lease is that the lessor (the legal owner of the plant and machinery) is effectively lending money to the lessee (the person using the asset) to enable the lessee to buy the plant and machinery. 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 regime if they do not want to, but can instead claim a deduction for lease rentals in the usual way.

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.

For more information on long funding leases, see Simon’s Taxes B3.340Y–B3.340ZC.

Relief for long funding leases

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. Consequently, any deductions the lessee has made for depreciation expense must be added back for tax purposes. See the Capital allowances computations 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 made 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 taxed as interest income in the hands of the lessor. The

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