A new 40 percent first year allowance (FYA) will be available to UK corporates and UK unincorporated businesses. Most of the standard FYA general exclusions will apply.
However, leasing will be permitted provided that the lessee uses the asset ‘wholly, or almost wholly’ for earning income chargeable to UK tax. This would cover leases to UK businesses (incorporated or not) and taxable UK establishments of overseas businesses.
Leasing will also be permitted if the asset is provided to a lessee who is resident in the UK where the asset is not for use ‘to a significant extent’ for earning income from a source outside the UK and outside the charge to UK tax. Thus a lease to a UK company which uses the leased asset in its overseas branch should be acceptable provided the lessee has not made the branch exemption election. The lessor is required to assume there is a branch exemption election in place unless it has been established to the contrary.
In the above tests, income is not considered chargeable to UK tax if no UK tax is due as a result of double taxation reliefs.
It is to be hoped that HMRC guidance - expected later in December 2025 - will expand on the interpretation of the terms ‘wholly, or almost wholly’ and ‘significant’ as used in the above two tests.
Sub-leasing is permitted provided the sub-lessee also satisfies the tests applicable to the lessee.
Leased electric cars do not qualify for the new 40 percent allowance as ‘general exclusion 2’ still precludes an FYA.
As assets must be ‘unused’ and not second-hand, refinancing existing assets using sale and leasebacks would appear not to qualify. Care will be needed to ensure arrangements qualify as leases of unused assets. For example, if a trading company is acquiring new assets which are to be financed by leasing, they may need to consider agency arrangements to avoid the need for a sale to the financier.
Leases to UK lessees which are not corporates are permitted under the draft new rules. However, such leases may fall within the Disclosure of Tax Avoidance Schemes (DOTAS) leasing ‘hallmark’ hence there may be a reduced appetite to enter into such arrangements with non-corporate lessees.
There is a targeted anti-avoidance rule (TAAR), which provides that, where obtaining a tax advantage is the main purposes or one of the main purposes of an arrangement, FYA is denied.
Where a 40 percent FYA has been claimed and the asset is later disposed of, the normal disposal rules apply, without requiring a free-standing balancing charge as for super-deduction or full expensing.
Aside from leasing, this relief also provides the opportunity to claim FYA for unincorporated businesses who have been excluded from recent super-deduction and full expensing regimes, albeit at a lower rate.
These changes are likely to have a substantial impact for large lessors of plant and machinery, who up until now, have been largely excluded from the opportunity to claim FYAs. It should also have the effect of reducing funding costs for lessees, where the benefit of increased capital allowances can be factored into the lease costs, sharing the benefit of the new FYA between lessor and lessee.
It will be important to confirm whether the assets do in fact qualify for main pool allowances, however, as there is no corresponding FYA for special rate expenditure such as long-life assets (which have a useful economic life of 25 years or more).
The Leasing tax team at KPMG in the UK will produce further updates once HMRC have published guidance.