Capital Allowances Act 2001 section 228L

Determining the net present value of the rentals for purposes of section 228K

Section 228L sets out the method for calculating the net present value of rental payments, which is needed when applying the anti-avoidance rule in section 228K concerning disposals of leased plant or machinery where the seller retains an income stream.

• The net present value of rentals payable on or after the relevant day is calculated using a five-step discounting process applied to each individual rental payment
• Each rental payment is discounted back to the relevant day using the formula RI divided by (1 + T) raised to the power of i, where T is the temporal discount rate and i is the number of days from the relevant day to the payment day divided by 365
• The temporal discount rate is 3.5%, although the Treasury has the power to change this rate by regulations
• All the individual discounted rental amounts are then added together to produce the total net present value of the rentals