In the early days of leasing the lessor could often keep the
benefit of any tax advantage, but competition has gradually forced
lessors to pass on the benefits to the lessee. This usually takes
the form of reduced rentals but is sometimes reflected in the price
paid to the lessee in a sale-and-leaseback deal (that is, the
capital repayment element in the rentals might be less than the
capital price paid to the lessee for the kit). Further guidance on
sale and leaseback transactions is at
BLM32500 onwards.
In small ticket leasing the tax timing benefit is very small
compared with the margins charged. For example, the tax timing
benefit might allow a reduction in the interest element of rentals
of 0.5% (from, say, an implied rate of interest of 10% to 9.5%).
Where a lessor has a cost of borrowing of (say) 5% it is moot as to
whether the lessor can be said to be passing on any benefit to the
lessee – or is just charging a margin of 4.5% rather than 5%.
In contrast, in big ticket deals the rate of interest implied
in the lease may be reduced by 1.5% or more. This allows the lessor
to offer sub-LIBOR borrowing to the lessee. For example, the lessor
may borrow at 5% and lend (via a tax lease) at 4%. It is clear that
the tax advantages are being passed to the lessee.
Lessors will not pass on all the value of the tax-timing
advantage. The proportion passed on will depend on the strength of
the lessee’s negotiating position. Where the lessee is in a
strong position it might succeed in negotiating 80% - or even more
– of the benefit.
