Finance lease
Finance leases sit between hire purchase and operating lease. Like HP, the asset is normally on the borrower's balance sheet under modern UK accounting standards, because the lease effectively transfers substantially all the risks and rewards of ownership. Unlike HP, legal title never transfers — the asset belongs to the lender throughout and beyond the primary term.
Rentals on a finance lease are typically structured to recover the full capital cost of the asset plus the lender's return, usually leaving a small residual value at the end of the primary term. The business can extend into a secondary period at a peppercorn rent (often 1 to 3 per cent of original cost per year) or sell the asset on the lender's behalf, retaining most of the sale proceeds.
VAT is charged on each rental rather than up-front, which makes finance leases attractive for businesses that want to spread the VAT cost over the term. Capital allowances are claimed by the lender, not the borrower, but this is usually priced into the rentals.
Worked example
How the numbers play out
A logistics company finance-leases a £40,000 forklift over five years. Annual rentals are around £9,500 plus VAT, with VAT recovered quarterly. At the end of year five, the company continues to use the forklift on a £400-a-year secondary rental or arranges its sale, keeping 95 per cent of the proceeds.
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