Finance lease is a leasing arrangement that transfers substantially all the risks and rewards of ownership of an asset to the lessee. Determining whether a lease is a finance lease or not involves an element of judgement. Some finance leases are, however, easily distinguishable from operating leases.

Full amortisation finance lease
This is the most common type of finance lease in the UK. The main characteristics are:

• Non-cancellable primary period during which the lessor receives sufficient rentals to recover the cost of investment, interest and profit.
• Option for secondary period of rentals.
• Peppercorn rentals during the secondary period.
• Option for the asset to be sold after the primary period and bulk of the proceeds are to be passed back to the lessee as a rebate on rentals.

Structured finance lease
The structured lease is a kind of full-amortisation lease that incorporates uneven rentals. Depending on the degree to which the lessor is willing to tailor the rental payments to meet the customer's cash flow requirements, various types of lease structures are possible. The most common type of structured lease is the 'balloon' lease, which has a high rental payment at the end of the lease.

Less than full pay-out finance lease
Increasingly, finance leases are being written where the lessor takes some level of residual risk albeit at a smaller level. These types of leases therefore include legal terms that deal with the condition of assets and their return, which are similar to those of operating leases. The main feature that distinguishes these leases from operating leases is the relatively smaller residual investment by the lessor remaining unrecovered at the end of the lease term.

Tax and accounting considerations

• The asset will be on the balance sheet of the lessee
• Regular payments are deductible against tax
• Not possible to claim capital allowances
• Possible to reclaim the VAT on payments
• Possible to reclaim the interest paid against tax

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If you are interested in finding out more about finance leases / commercial vehicle finance or would like to get some free quotes from leading finance companies then please go to the contact us section or telephone us on (020) 7016 9775.

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Last modified: 27/10/2004 16:03:32