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Operating lease with option to purchase – Building

Ever seen this set up used to acquire/construct a building.

Didn't find your answer?

Farming client is looking to construct some sheds and this is an option that is being pushed by the finance company claiming it will get them 100% tax relief on the buildings. It looks like they pay the supplier direct to construct the buildings. Once constructed, they own the title, and enter into a 5 year lease agreement with our client. At the end of the 5 years they will then offer the title to our client for 1% of the construction cost.

Clearly at some point the title to the land passes to the finance company but that part isn’t clear.

It’s late and my brain isn’t really working, but it just doesn’t feel right on first reading and I’ll need to do some more digging.

I’ve seen similar arrangements with plant and machinery items, but not a building.

I was just wondering if anyone had seen any similar arrangements?

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Hallerud at Easter
By DJKL
14th Jul 2020 09:41

Ignoring how/if it all works re tax for a minute, effectively for x period Mr/Mrs Farmer has given up legal title to some land on his/her farm. Whilst told he/she is getting it back what protection is there for him/her if leasing company goes bust? Does Farmer hold any security over land, how is he/she protected etc?

To me the risks here are not tax but having a hole punched out of the middle of one's farm, is the risk worth the reward?

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Replying to DJKL:
Lone Wolf
By Lone_Wolf
14th Jul 2020 09:57

A good point, and one we'll need to clarify. The initial emails don't go into that element, but something must happen to pass the title of the land to the finance company.

And if there is some sort of security held by the farmer, it just feels like the sort of thing that'd be caught by the "arrangement to avoid tax" line that appears all over the legislation.

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Replying to Lone_Wolf:
Hallerud at Easter
By DJKL
14th Jul 2020 10:03

The older I get the less I like such complicated arrangements.

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Replying to DJKL:
Routemaster image
By tom123
14th Jul 2020 10:05

Agree - you should never let the tax tail wag the dog

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By paul.benny
14th Jul 2020 10:11

Would title to the land need to pass to the finance company? Might the arrangement work with a five year lease? Back to back leases on land and building would appear to protect the farmer's position but it would be as well to get legal advice.

And the sale at the end. Does the farmer have the *right* to purchase at the specified price?

Agree with DJKL. There appear to be non tax risks that should be understood.

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By johnt27
14th Jul 2020 15:22

On the face of it, without knowing the details, it sounds like a finance lease or something akin to a sale and leaseback arrangement. More often than not the tax treatment would follow the accounting treatment so I would get that right first.

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Replying to johnt27:
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By Tax Dragon
14th Jul 2020 15:36

Does that answer depend on whether the farming client is incorporated? I know Pt12A ITA 2007 has a corresponding equivalent in the CT Acts, but I was thinking more generally. (I haven't thought about whether those anti-avoidance rules would apply, BTW, but this thread would not be complete without a reference to them, IMO.)

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Replying to Tax Dragon:
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By johnt27
14th Jul 2020 15:54

It would, but in the absence of the necessary detail (alongside my lack of decent personal tax knowledge) it's hard to say

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By Montrose
14th Jul 2020 19:17

Question for lawyers, not bean counters
Is the lease a lease of plant, so that there is no question of title to land?

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