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B5.405 Long funding leases—overview

Special rules¹ apply to lessors and lessees under 'long funding leases' of plant or machinery, broadly, longer leases which function as financing transactions. The intention is that such leases are taxed broadly by reference to their commercial substance rather than their legal form, in order to avoid the distortion of commercial decisions by the tax treatment. Therefore, the taxation of long funding lessors is similar to that applying if the had made a loan, and the taxation of the lessee is similar to that applying if they had purchased the asset. However, because they are not in fact loans they are not taxed under the loan relationship rules (in Division D1.7).

The effects of the rules are broadly as follows².

1. Ìý

   •ÌýÌýÌýÌý capital allowances are not available to the lessor but instead are usually available to the lessee (see B3.340Y–B3.340ZB)

2. Ìý

   •ÌýÌýÌýÌý the lessor is taxed only on that proportion