The fundamental characteristics of a Finance Lease is that the ownership
never passes to you.
As a result, the Leasing company claims the capital allowances and
passes that benefit on by reducing your rental charges.
You will be responsible for the maintenance of the equipment and
can usually deduct the full cost of Lease rentals from your taxable
income as a trading expense.
The Finance Lease or ‘Full Payout Lease‘ is closest to the Hire
The Leasing company recovers the full cost of the equipment,
plus charges, over the period of the Lease and, although the
business customer does not own the equipment, they have most
of the ‘risks and rewards’ associated with ownership.
When the Lease period ends, you have a number of options.
The Leasing company will usually agree to a secondary Lease
period or, if you wish to stop using the equipment, it can be
be sold second-hand to an unrelated third party.
You will have to arrange the sale on behalf of the Leasing company
and the Leasing company will obtain the bulk of the sale proceeds.
There are a variety of types of Leasing arrangements and we’ve
had many cases where one of our specialists have helped a client
benefit from one of them.
Unlike a Finance Lease, an Operating Lease does not transfer all the risks and rewards of ownership of the asset over to you.
The key difference between the two is that an Operating Lease is only for part of the asset’s ‘useful life’.
This means that, as the cost is based on the difference between the asset’s original purchase price and its residual value at the end of your agreement, you will pay a reduced rental.
The customer ‘rents’ the asset over the agreed contract period in return for rental payments. These payments do not cover the full cost of the asset as is the case in a Finance Lease.
The Leasing company will predict a value for the asset at the end of the term based on its expected resale value and will then build the estimated value into the contract.
This type of Leasing is common for equipment where there is a well-established second-hand market (e.g. cars and construction equipment).
The Lease period is always less than the working life of the machine and assets financed under Operating Leases are not shown as assets on Balance Sheet.
Instead, the entire Operating Lease cost is treated as a cost in your Profit and Loss account.
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