188体育

Concept of 鈥榙efeasance鈥�

Defeasance is a term applied to arrangements made by a borrower who sets assets aside to cover the liability.听 In the context of leasing it is used where arrangements are put in place to remove the usual risk of a lessor that payments will not be made under the lease.

Thus, under a straightforward finance lease, the lessor provides the finance that the lessee needs to acquire an asset.听 The lessor, as the owner of the asset, is entitled to claim capital allowances, and the tax benefit of these allowances may be passed on to the lessee in the form of lower lease rentals.听 But some finance leasing schemes do not involve the provision of new finance, and they are in substance no more than arrangements for the sale of the benefit of the capital allowances, with little or no risk to the lessor.听 Such leases are said to have been 鈥榙efeased鈥�, which is further explained at CFM11170.

Special rules for ships leased to tonnage tax companies

Tonnage tax companies cannot themselves claim capital allowances, and there are special rules (in FA00/SCH22/PART10) to prevent lessors claiming capital allowances if they have not provided the finance required to purchase the underlying asset.

No capital allowances are available if the lease is part of sale and lease-back arrangements, even if those arrangements do not involve defeasance, see TTM10200.

For new acquisitions, the special rules are intended to prevent allowances being given where there is:
听

• 鈥榗ash defeasance鈥�, whereby the proceeds of the financing arrangement finds its way back into the banking system, for instance by a defeasance payment being deposited in a bank account from which the lease rentals are paid, or
• 鈥榣egal defeasance鈥�, whereby a third party assumes all the rental obligations under the lease in return for a defeasance payment from the lessee.

However, 鈥榣everaged leasing鈥� is effectively permitted, that is, the lessor may lay off (share) the risk with a third party, as long as the arrangements with the third party do not themselves involve defeasance.

How the special rules work

Defeasance schemes can take many forms, and so the rules work by denying capital allowances in cases where the arrangements remove the whole, or the greater part, of the lessor鈥檚 non-compliance risk, see TTM10110.

When considering the extent of the lessor鈥檚 non-compliance risk for this purpose, certain forms of security may be disregarded. These are known as 鈥榚xcepted forms of security鈥�, see TTM10120听and TTM10130.

References

FA00/SCH22/PARA90 (defeased leasing)	TTM17496
FA00/SCH22/PARA91 (excepted forms of security)	TTM17501
FA00/SCH22/PARA92 (sale and lease-back arrangements)	TTM17536
Meaning of defeased leasing	TTM10110