BLM15070 - Lease accounting: finance lease accounting: finance lessees: lessee accounting with loaded rental structures
This manual is being updated to reflect FRS 102 (2024 amendments). For guidance on the tax treatment of accounts prepared under IFRS 16 or the revised FRS 102, please refer to pages within the BLM50000 chapter.
Example 1, which follows at BLM15500Ìý´Ç²Ô·É²¹°ù»å²õ, illustratesÌýcases whereÌýthe rental paymentsÌýin the primary lease period are constant throughout.Ìý
In some instances, however,Ìýpayments may be loaded towards the 'front-end' of the lease (as was the case in Threlfall v Jones, 66TC77). ÌýIn others the payments may be loaded towards the ‘back-end’Ìý(sometimes called balloon leases).Ìý
The issue ofÌýStatement of Practice 3/91 was prompted by the existence of structures involving 'front-loaded' leases which sought to maximise the tax benefits inherent in finance leasing. ÌýIt is also undoubtedly the case that some leases where payments are loaded towards the back-endÌýare very tax efficient. ÌýBut leases with skewed rental profiles are not necessarily all about avoiding tax. ÌýDifferent rental structures may be arranged for severalÌýreasons. ÌýFor example, if rentals are to be funded from the income produced by the leased asset and the asset is not fully income producing from the outset, a rental structure which recognises this may be implemented.Ìý
Example 2, following at BLM15600Ìý´Ç²Ô·É²¹°ù»å²õ, illustrates the consequences of heavily back-loaded rentals.Ìý