BLM41040 - Taxation of long funding leases: long funding operating lessors: lease terminates as expected; part 1 of 2
Example
Assume that the asset in the example in BLM41020 is sold for what turns out to be its market value of £7,000 at the end of year 15 and that nothing is paid to the lessee, even though the market value exceeds the expected value.
Step 1 is to find:
- the termination amount (TA, see BLM41050). In this case the asset is sold at the end of year 15. This sale would have been a disposal event had the lessor claimed capital allowances and it occurs as a result of (or in connection with) the termination of the lease. Therefore the termination amount (TA) is £7,000.
- the total of any sums paid to the lessee that are calculated by reference to the termination value (LP). The termination value is defined in CAA01/S70YH but as nothing was paid to the lessee, in this case LP is 0.
Step 2 is to find:
- the starting value for the purpose of CTA10/S363-365(SV). In this example it is £20,000.
- the total of the deductions allowable under CTA10/S363-365 (TD1). In this example it is 15 x £1,000 = £15,000.
- the amount (ERV) by which SV exceeds TD1. In this example it is £5,000.
Step 3 is to find:
- the amount of any additional expenditure for the purpose of CTA10/S366-368 (TAE). In this example it is £5,000.
- the total of the deductions allowable under CTA10/S366-368 (TD2). In this example it is 10 x £400 = £4,000.
- the amount (EAE) by which TAE (£5,000) exceeds TD2 (£4,000). In this example it is £1,000.
Step 4 is to:
Add ERV (£5,000) and EAE (£1,000) to give T. Here T is £6,000.
As (TA - LP) (£7,000) exceeds T (£6,000), the lessor is treated as making an additional profit of £1,000.
In summary the commercial position is:
Entry | Amount |
---|---|
Rentals - years 1-5: 5 x £1,300 | £6,000 |
Rentals - years 6-15: 10 x £1,900 | £19,000 |
£25,500 | |
Cost | -£20,000 |
Additions | -£5,000 |
Sale proceeds | £7,000 |
Overall profit | £7,500 |
The overall tax position is:
Entry | Amount |
---|---|
Rentals - years 1-5: 5 x £1300 | £6,000 |
Rentals - years 6-15: 10 x £1,900 | £19,000 |
£25,500 | |
Deductions s.502E | -£15,000 |
Deductions s.502F | -£4,000 |
Additional profit s.502G | £1,000 |
Overall profit | £7,500 |