Finance Lease
An asset finance structure where the business uses an asset for most of its useful life while the lender retains legal ownership.
A finance lease is an agreement under which a lender (lessor) acquires an asset and leases it to a business (lessee) for a primary period covering most of the asset's useful economic life. The business pays monthly rentals covering the full cost of the asset plus the lender's margin over the lease term. Legal ownership remains with the lender throughout.
At the end of the primary lease period, the business typically has three options: enter a secondary lease at a nominal 'peppercorn' rent (retaining use of the asset), sell the asset on the lender's behalf (retaining typically 95-98% of proceeds), or return the asset. The inability to own the asset outright distinguishes a finance lease from hire purchase.
VAT is charged on each monthly rental under a finance lease, improving cash flow compared to hire purchase where full VAT is payable upfront. The lease payments are also fully deductible as a business expense, which can be advantageous depending on the business's tax position.
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