TTM10110 - Ship leasing: Defeased leasing
Meaning of 'defeasance'
Background
As the owner of the leased asset, a finance lessor is normally entitled to claim capital allowances in respect of capital expenditure incurred in acquiring the asset.
However, a finance lessor will not be entitled to any capital allowances in respect of capital expenditure incurred on a qualifying ship provided to a tonnage tax company if the lease is defeased.
Definition
A lease will be regarded as defeased for this purpose if the leasing arrangements include provisions which have the effect of removing the whole or greater part of any non-compliance risk which would otherwise fall, directly or indirectly, on the lessor.
For this purpose:
- a non-compliance risk means a risk that a loss will be sustained by any person if payments under the lease are not made in accordance with its terms, and
- the lessor and any persons connected with him are treated as the same person; connected person has the meaning given in CTA10/S1122.
In practice, we regard the 'greater part’ of the risk as having been removed if more than 50% of the risk has been removed by the defeasance arrangements.
Excepted forms of security
When considering the extent of the lessor’s non-compliance risk for this purpose, certain forms of security may be disregarded. These are known as ‘excepted forms of security’, and they consist of:
- certain parental or third party guarantees, see TTM10120, and
- certain forms of security derived from the ship itself, see TTM10130.
There is no limit to the amount of excepted security that can be provided in respect of a finance lease of a qualifying ship to a tonnage tax company.
References
| FA00/SCH22/PARA90 (defeased leasing) | |
| FA00/SCH22/PARA91 (excepted forms of security) | TTM17501 |