BLM30040 - Taxation of leases that
are not long funding leases: tax advantages: examples comparing a
loan and a finance lease, part 1 of 3
The following examples illustrate how the commercial and tax
profits of each party are computed where a banker makes a loan with
which a trader acquires machinery (Example 1) and where a finance
lessor buys similar machinery and finance leases it to the trader
(Example 2).
Example 1
A banker lends £1,000 to a trader for five years and
- the loan is repayable over the five years
in the same way as a repayment mortgage,
- the trader uses the loan to buy
£1,000 of machinery which is worthless at the end of the loan
term,
- £200 worth of interest is charged on
the £1,000 loan; this represents an interest rate of around 8%
on the declining loan balance,
- £180 of expenses are payable by the
bank, including interest payable of £160 on money the bank
borrowed to fund the loan; this represents an interest rate of
around 6.4%.
Example 2
A finance lessor buys similar kit for £1,000 and, in
effect, makes a 'loan' to a trader on similar terms to those in
Example 1. That is, the lessor
- finance leases the kit to the trader over
a primary period of five years,
- the kit is worthless at the end of the
lease,
- £200 of 'interest' is charged by the
lessor, so that the total rentals payable by the lessee are
£1,200,
- £180 of expenses are payable by the
lessor, including £160 of interest on the money borrowed to
fund the lease.
