Finance Leasing Manual - FLM3.04

Basic tax advantages of finance leasing

In the case of a business loan the lender is simply liable on the interest received. In the case of an equivalent finance lease of machinery and plant, the lessor is liable on the total rents ('loan repayment' plus 'interest') minus the capital allowances.

Similarly, in the case of a business loan to buy machinery and plant, the borrower can have a trading deduction for the interest payable but not for the repayments of the loan. Instead the borrower gets capital allowances on the cost of the asset. In the case of a finance lease of a business asset the 'borrower' (lessee) will get trading deductions for the rentals payable; that is, a total amount equal to the 'interest' and 'loan'. The timing of the deductions will follow accountancy practice for interest deductions and depreciation on the asset. The total deductions will equal the ordinary borrower's deductions and capital allowances, but the timing of relief may be very different.