Sale and leaseback

Produced by Tolley

The following Corporation Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Sale and leaseback
  • Sale and leaseback of land
  • Sale of a short lease
  • Assets other than land
  • Sale and leaseback other than land
  • Amounts of premium treated as income receipts

Sale and leaseback

A sale and leaseback situation arises where land or an interest in land is sold on the basis that the purchaser must grant a lease back to the vendor, or a person connected with the vendor.

This guidance note deals with the following anti-avoidance rules which may impact on sale and leaseback arrangements:

  1. rules limiting the amount of corporation tax deduction available for rental payments following a sale and leaseback (CTA 2010, ss 834-886); and

  2. rules which treat a portion of the sale price as income rather than capital in certain specified circumstances (CTA 2009, s 225)

Sale and leaseback of land

CTA 2010, ss 834-886 set out anti-avoidance rules relating to sale and leaseback. The provisions are split into two types, those dealing with land and those dealing with other assets.

The provisions are very widely drawn to catch any transaction involving the transfer of land. If, following the transfer of land, the person who was the transferor, or any person associated with them, has to pay rent under a lease of the land, then the scenario is caught by the provisions.

This is to stop traders from taking land which is a capital asset not receiving any tax deductions, and converting it to a lease with rental payments which will receive tax deductions. This is normally achieved by selling the land to a bank then immediately leasing it back. The capital sum received on the sale of the land is normally sheltered from capital gains tax in some way. The lease payments are usually front loaded to ensure the bank gets its money back as soon as possible.

A typical scenario may be a sale of land for £1m with rentals to be paid of £200,000 in each of the first five years then £50,000 in years 7 and 8 dropping to £1,500 a year. Therefore, the bank only has to wait five years to recover its money and then effectively gets interest on the amount

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