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Changes to the Sale of Lessor rules

The Government introduced Sale of Lessor legislation in Finance Act 2006 which targeted the sale of leasing companies. The aim of the legislation was to target so-called “leasetail” transactions whereby a lessor aims to avoid paying tax on profits arising in the later years of a lease (when a company’s rental income is no longer sheltered by capital allowances), by selling the “leasetail” company to a company with tax losses. The legislation creates a deemed charge broadly equal to any deferred tax liability on the balance sheet of the leasing company which arises in the leasing company immediately prior to the disposal of the business. An equal and opposite deduction is deemed to arise in the company immediately following the disposal of the company.

The government announced in the 2006 Pre Budget Report that they were going to target certain transactions which sought to reduce or avoid a tax charge arising due to the Sale of Lessor rules. Such transactions operated in two ways:

• By using the mismatch between the concepts of control in the Sale of Lessor rules and in section 343 ICTA to avoid any material Sale of Lessor charge arising.
• By reducing the balance sheet value of the relevant assets so that the Sale of Lessor charge is reduced or eliminated.

The changes announced in the 2006 Pre Budget Report affects transactions undertaken from 22 November 2006.

The Government has now introduced amended draft legislation to ensure that the limitations placed on the eligibility for s343 ICTA treatment which applied from 22 November 2006 to leasing companies with an ultimate 100% shareholder will also apply to leasing subsidiaries owned by consortia for transfers of leasing trades on or after 21 March 2007.