The New UK Leasing Regime

Since December 2004, the UK tax authorities (“HMRC”) have been reviewing the tax treatment of lessors in relation to leases of plant and machinery – including ships. The expressed aim of the reform was to harmonise the accounting and tax treatment of leasing transactions by awarding UK tax depreciation (capital allow-ances) to the economic owner of the asset and taxing the “lender” under a finance lease on its interest return only. However, as a sub-text, there were concerns that the former UK regime breached the requirements of the European Union “freedoms”, in that capital allowances were limited or prohibited if the lessee did not carry on activities which were taxable in the UK, thus treating UK taxpayers more favourably than persons based in other EU member states, something generally prohibited under the rules of the EU.

The review is now complete, and the legislation introducing the new regime was enacted on 19 July 2006 and has taken effect, although subject to a complex set of transitional provisions. The end result is that whilst capital allowances are now available to a UK lessor in a more restricted range of transactions, the class of potential lessees is greatly widened, as the UK’s notorious “overseas leasing” rules have been abolished. In addition, capital allowances can now be available in the UK to a person who has no ownership interest in the asset. Non-UK residents can now access the UK lease market without needing to establish a UK place of business, and UK lessors can lease to non-residents without suffering a penal tax regime, under which they were taxed on gross rents but with no tax relief for the cost of the asset. This is good news in an environment where the number of tax-favoured financing structures available internationally is diminishing.

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