BLM70240 - 바카라 사이트˜Income-into-capital바카라 사이트™ schemes and back loaded leases: Introduction to 'income-into-capital' schemes: worked example of main principles
Example
Suppose (a variation on the example at BLM70235):
- there is a eight year finance lease (or a three year finance lease with a five year secondary period) of a real property asset,
- the total rentals due are £900,
- the total interest element in those rents is £120,
- the total capital element in those rentals is £780,
- no rents at all were payable for the first three years,
- there is an option to pay off the 바카라 사이트˜loan바카라 사이트™ and 바카라 사이트˜interest바카라 사이트™ for a capital sum at the end of Year 3, but if the option is not taken up, there are level rentals for Years 4 to 8 which recover all the capital together with the outstanding 바카라 사이트˜interest바카라 사이트™, and
- the lessor charges an interest rate of 12%.
The original 바카라 사이트˜loan바카라 사이트™ of £780 compounded at 12% interest for three years at annual rests produces a debt of £1,096 at the end of the three years. Ignoring the tax effects, this might be the lump sum the lessee has to pay to get the asset back. If the lessee does not pay, the rentals are calculated using the usual repayment mortgage principles as follows. (Because of rounding errors the figures don바카라 사이트™t always add up precisely).
| Years | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | Totals |
|---|---|---|---|---|---|---|---|---|---|
| Total rent | 0 | 0 | 0 | 304 | 304 | 304 | 304 | 304 | 1,520 |
| Capital | 0 | 0 | 0 | 172 | 193 | 216 | 242 | 271 | 1,095 |
| Interest | 94 | 105 | 117 | 132 | 111 | 88 | 62 | 33 | 740 |
In Years 1 to 3 the commercial accounts show total 바카라 사이트˜interest바카라 사이트™ earnings of £316 (£94 + £105 + £117). But there are no actual cash receipts. The 바카라 사이트˜interest바카라 사이트™ is the amount taxed by FA97/Sch 12.
If the lessee doesn바카라 사이트™t acquire the asset for £1,096 at the end of Year 3 it has to pay the 바카라 사이트˜total rent바카라 사이트™ of £1,520 shown for Years 4-8. The 바카라 사이트˜interest바카라 사이트™ in the rent for these five years is £424 (£132 + £111 +£88 + £62 + £33). This £424 includes 바카라 사이트˜interest바카라 사이트™ due for the first three years of the lease (£316) when no rentals were paid. Since Part 21 of CTA 2010 will tax that £316 over those first three years there is a mechanism to reduce the amounts of actual rent taxable (in years 4 - 8) by the amounts previously taxed (in years 1 - 3). so avoiding a double charge.