BLM11005 - Lease accounting: lease classification: introduction to detail
Source: gov.uk (2025-08-28)


This manual is being updated to reflect FRS 102 (2024 amendments). For guidance on the tax treatment of accounts prepared under IFRS 16 or the revised FRS 102, please refer to pages within the BLM50000 (https://www.gov.uk/hmrc-internal-manuals/business-leasing-manual/blm50000) chapter.

FRS 102 (Pre 2024 amendments) and FRS 105

Prior to the 2024 amendments FRS 102 classified leases as finance leases or operating leases for both lessees and lessors.

Under this framework, the way in which leases are classified and accounted for is dependent on which party holds substantially all the risks and rewards of ownership of the asset. There are several key concepts that need to be considered when looking at the classification of a lease including

the minimum lease payments - BLM11010 (https://www.gov.uk/hmrc-internal-manuals/business-leasing-manual/blm11010)

the term of the lease -BLM11015 (https://www.gov.uk/hmrc-internal-manuals/business-leasing-manual/blm11015)

fair value - BLM11020 (https://www.gov.uk/hmrc-internal-manuals/business-leasing-manual/blm11020)

residual values and guarantees – BLM11025 (https://www.gov.uk/hmrc-internal-manuals/business-leasing-manual/blm11025)

FRS 105 Section 15 continues to maintain an operating and finance lease distinction for both lessees and lessors.

FRS 102 (2024 amendments) and IFRS

IFRS 16 removed the distinction between finance leases and operating leases and introduces a single on-balance sheet lessee accounting model that, with some limited exemptions for short-term leases and leases of low value assets, will apply to all leases. Following the 2024 periodic review, the single lessee accounting model was also adopted for FRS 102 (2024 amendments). Once it has been determined that a contract contains a lease (see BLM10012 (https://www.gov.uk/hmrc-internal-manuals/business-leasing-manual/blm10012)) lessees account for all leases in the same way. See section BLM17000 (https://www.gov.uk/hmrc-internal-manuals/business-leasing-manual/blm17000)+ for details of accounting under the single lessee accounting model.

For lessors, IFRS 16 and FRS 102 (2024 amendments) retain the distinction between finance leases and operating leases.

Tax impact of Lease Classification

Whether a lease is a finance lease or an operating lease remains important for tax purposes. Lessees preparing accounts using FRS 102 (2024 amendments) or IFRS 16 must still determine whether they would have accounted for the lease as a finance or operating lease were they required to make that determination under GAAP where the legislation requires (see the list at BLM51025 (https://www.gov.uk/hmrc-internal-manuals/business-leasing-manual/blm51025)). This is despite the fact that under FRS 102 (2024 amendments) and IFRS 16 the distinction no longer exists for lessees.

The nature of the asset does not affect the accounting classification of the lease. The characteristics of a finance lease of land are therefore the same as those of a finance lease of plant or machinery.

The definitions of a finance lease can be found at BLM11200 (https://www.gov.uk/hmrc-internal-manuals/business-leasing-manual/blm11200).

The definition of an operating lease can be found at BLM11215 (https://www.gov.uk/hmrc-internal-manuals/business-leasing-manual/blm11215).