A finance lease typically has a primary period for a fixed amount of time at full cost, followed by a secondary period, usually of an indefinite length, at a very low cost or you can sell or scrap the equipment.
The leasing company buys the asset for your business and rents it to you for an agreed period.
The Leasing company retains ownership of the asset, but your business gets exclusive use of the asset (providing it observes the terms of the lease).
Your Business will make rental payments that cover the original cost of the asset, during the period of the lease. There is an obligation to pay all the rentals and once these have all been paid, the Leasing Company will have recovered its investment.
What happens at the end of the lease?
What happens at the end of the finance lease period will vary and depends on the actual agreement, but the following are possible options:
Your business can sell the asset to a third party, acting on behalf of the Leasing company.
The asset is returned to the Leasing company to be sold.
When the asset is sold, your business may be given a rebate of rentals which equates to the majority of the sale proceeds (less the costs of disposal) as agreed in the lease contract.
If your business wants to keep using the asset, the lease enters a secondary rental period which is usually lower than the primary rental (a peppercorn rental) This may continue indefinitely and will come to an end when the Leasing company and your business agree or when the asset is sold.
Your Business enters a secondary lease period. The secondary rental may be much lower than the primary rental (a ‘peppercorn’ rental) or the lease may continue on a month by month basis at the same rental.
Who owns the asset?
The Leasing Company is the owner.
VAT is payable on each instalment.
Who claims capital allowances?
The Leasing Company claims Capital allowances
Who claims depreciation?
The Leasing Company claims depreciation.
Rental Payments are shown as an expense in your profit and loss account.
Your business will need to show the leased asset on your balance sheet as a capital item.
Maintenance and Insurance?
Your business is responsible for both maintenance and insurance.