BLM71305 - ’Income-into-capital’ schemes and back loaded leases: 'Income-into-capital' schemes: example, part 2 of 5 -accountancy treatment - detail

Example

In the example at BLM71300 the lessor (Bank) accounts for the transaction as a finance lease. The option is likely to be exercised because Bank will charge Borrower more if it gets its money back in taxable form (as rents) rather than as a capital sum which escapes tax. So Bank will get back its ‘loan’ with ‘interest’. Accounting standards therefore require the excess of option proceeds over the cost of the property (£100m - £70m = £30m) to be included in income annually. It is ‘interest’ and will be spread using the normal accountancy approach; that is, in proportion to the debt outstanding each year, see BLM14000 onwards.

This means that over the 7 year period ‘interest’ of £70m will be recognised as income. Bank’s expenses (Bank’s funding costs) over the 7 year period total £63m (£9m x 7 years). So there is a net overall commercial profit of £7 million. The profit and loss account comes down to:

In £millions

Year	1	2	3	4	5	6	7	8	Total
Option excess	0	4	4	4	4	4	5	5	30
Rent	0	3	4	5	6	7	7	8	40
Total income	0	7	8	9	10	11	12	13	70
Expense	0	-6	-7	-8	-9	-10	-11	-12	-63
Profit/(Loss)	0	1	1	1	1	1	1	1	7