Long Funding Leases, The Rules and Their Effect On Capital Allowances

Following the extension to allow Landlords to claim the new Super-deduction, we thought it worth talking about LONG FUNDING LEASES (LFL).  These rules can also a lessor is precluded from claiming capital allowances.

Where a long funding lease is in place, the capital allowances treatment is that the lessor, the legal owner of the plant and machinery, is essentially lending money to the lessee, the person using the P&M, to enable the lessee to buy the plant and machinery.

The Rules

The most important element of the rules is that, provided certain conditions are met, capital allowances are available to the lessee rather than the lessor.  However, there are extensive exceptions to the long funding lease rules.  These notably affect fixtures and other plant included in, or sold with, property.

Whilst, there is no requirement for symmetry between lessor and lessee.  The tests for a long funding lease are carried out independently by lessors and lessees. So, a long funding lease for a lessor need not be a long funding lease for the corresponding lessee.  To prevent both parties claiming Capital Allowances, CAA2001 s70Q gives priority to the lessor.  If the lessor can claim Capital Allowances then the lessee cannot. Whilst Long Funding Leases adds another layer of complexity to leasing.  However, the existence of background plant and machinery means it should have no impact on the majority of property leases.

Landlords do need to be careful where they are leasing property that contains assets that are not regarded as background plant or machinery.  Particularly for properties where loose chattels are also leased along with the property.  This could change the income that needs to be recognised for tax purposes or any deductions allowed against that income.

For any lease of plant or machinery where Capital Allowances would normally be given, it is therefore necessary for the Landlord to now establish whether the lease is a Long Funding Lease.

Find Out More

To find out more about how LFL, its complexities and how this may affect your claim read our article here.  Key Notes_ Capital Allowances and Long Funding Leases 

HMRC Guidance can be found here.