A finance lease is a long-term rental agreement for an asset where the lessee (the business using the asset) uses it for substantially all of its useful life, but the lessor (the lender/owner) retains legal ownership throughout. At the end of the primary lease term, the lessee typically has the option to continue leasing at a nominal “peppercorn” rent, or the asset is sold with the proceeds shared.
Key Characteristics
- No ownership transfer: Unlike hire purchase, legal ownership does not pass to the business
- Full economic use: The lessee uses the asset for its productive life
- Balance sheet: Under IFRS 16, finance leases are recognised on the lessee’s balance sheet as a right-of-use asset with a corresponding lease liability [VERIFY accounting treatment guidance before publication]
- VAT: VAT is charged on each rental payment (not upfront on the asset value), which can benefit cash flow
Finance Lease vs Hire Purchase
| Feature | Finance Lease | Hire Purchase |
|---|---|---|
| Ownership at end | Stays with lessor | Transfers to lessee |
| Capital allowances | Claimed by lessor | Claimed by lessee (day one) |
| Balance sheet | Right-of-use asset | Asset + liability |
Finance Lease vs Operating Lease
A finance lease covers substantially all of the asset’s useful life. An operating lease is shorter â the asset retains residual value when returned to the lessor, who then re-leases or sells it.
Typical Uses
- Manufacturing equipment
- Medical equipment
- Technology assets with long useful lives
Related Terms
- Operating lease: shorter-term arrangement where the asset retains value on return
- Hire purchase: asset finance with ownership transfer on final payment
- Right-of-use asset: the balance sheet recognition of a leased asset under IFRS 16