BLM70215 - 鈥業ncome-into-capital鈥� schemes and back loaded leases: Introduction to 'income-into-capital' schemes: Chapter 2 of Part 21 CTA 2010 - 'income-into-capital' schemes
Chapter 2 of Part 21 of CTA 2010 schemes involve variations on the following arrangements:
- rentals under the finance lease are set low in the early years of the lease,
- at the end of the desired loan period (say 5 or 10 years) the lessee has an option to buy the asset for a capital sum - that sum is calculated to be the amount needed to pay off the balance of the 鈥榣oan鈥� with 鈥榠nterest鈥� after allowing for the (low) actual rents paid already.
In the commercial accounts the lessor recognises the 鈥榠nterest鈥� earned each year up to the option date, even where it has not been received (or receivable) and even though it may be paid in a capital form. For tax purposes the 鈥榠nterest鈥� in the capital sum may be a capital gain but any actual tax is typically avoided or reduced because of the availability of indexation and other capital gains reliefs.