BLM70240 - ‘Income-into-capital’ schemes and back loaded leases: Introduction to 'income-into-capital' schemes: worked example of main principles - HMRC internal manual - GOV.UK
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The original ‘loan’ 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 don’t always add up precisely).
In Years 1 to 3 the commercial accounts show total ‘interest’ earnings of £316 (£94 + £105 + £117). But there are no actual cash receipts. The ‘interest’ is the amount taxed by FA97/Sch 12.
If the lessee doesn’t acquire the asset for £1,096 at the end of Year 3 it has to pay the ‘total rent’ of £1,520 shown for Years 4-8. The ‘interest’ in the rent for these five years is £424
(£132 + £111 +£88 + £62 + £33). This £424 includes ‘interest’ 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.