Chapter CA23850
| Published date | 16 April 2016 |
| Record Number | CA23850 |
The minimum lease payments are the minimum payments over the term of the lease including any initial payment together with:
- (lessee) any residual amount guaranteed by the lessee or anyone connected with the lessee,
- (lessor) any residual amount guaranteed by the lessee or a person not connected with the lessor.
Ignore the part of any payment that represents charges for services or qualifying UK or foreign tax. Qualifying UK or foreign tax is any tax apart from income tax or corporation tax or the overseas equivalent.
Residual amount of a leased asset is so much of the fair value of the asset as cannot reasonably be expected to be recovered by the lessor from the payments under the lease.
The fair value of an asset is its market value less any grants receivable towards its purchase or use.
Example Dylan leases an asset to Garner. The market value of the asset is £1 million and Dylan received a grant of £150,000 towards its purchase. That makes the fair value of the asset £850,000. If the payments under the lease could be expected to recover £800,000 the residual amount is £50,000.
Term of a leaseThe term of a lease is the period beginning with the date on which the term of the lease begins and ending when the lease ends unless the lessee may terminate the lease early without payment. If the lessee may terminate the lease early without payment the term ends on the earliest date on which the lessee may terminate it without payment. If the lessee has an option to extend the lease and it is reasonably certain from the start that that the lessee will exercise the option the term of the lease ends when the period covered by the option ends.
These are the rules that apply if the market value of the leased asset is more than £1 million at the commencement of the term of the lease and the asset’s estimated market value 5 years later is more than half the market value. If the term of the lease would be 5 years or less but:
- the lessee has options to continue to lease the asset,
- the term of the lease at its inception would be more than 7 years assuming that it is reasonably certain that the lessee will exercise the options, and
- the lessee may be required to pay the lessor if it fails to exercise those options,
assume that the option to extend the lease will be exercised unless it is reasonably certain at the inception of the lease that it will not. This does not apply if:
- the lease...
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