BLM71005 - ‘Income-into-capital’ schemes and back loaded leases: ‘Income-into-capital’ schemes: comparison with ordinary loan

Suppose a Borrower wants to take out a loan of £10 million from a Bank for ten years at a commercial rate of interest, say 10%. If the Bank simply lent £10 million the Bank would pay tax on interest earnings of £1 million a year (after deductions for its financing and other costs). The main aim of the ‘income-into-capital’ leasing schemes was to convert the interest receipt into a non-taxable capital sum. The bank then saves a £300,000 a year in tax (£1 million at 30%), which competitive pressures generally ensure is partly passed on to the Borrower in the form of reduced interest costs.