Finance Leasing Manual - FLM12.12

Structure of the lease

The structure of the lease may have an impact on the timing of the rent deductions. A finance lease normally consists of two distinct periods (see FLM10.02 onwards):

• a 'primary' period (which protects the lessor by ensuring that the loan implied in the lease is repaid just as it would be under an actual loan), and

• a 'secondary' period (which protects the lessee by giving the lessee the right to carry on using the asset after the lessee has acquired economic ownership of it).

If these two distinct periods are absent from any finance lease agreement you should consider how the interests of the respective parties are protected and why the lease is structured as it is.

The absence of distinct primary and secondary lease periods does not mean that the lease has been set up to avoid tax. There are other reasons why other structures might be used. But it is important that if a different structure has been used you should find out why. What is the commercial logic for structuring the transaction in a particular way? Does the structure make sense commercially when viewed from the standpoint of each party to it? Does the structure protect the interests of each party? If not, how are each party's interests protected?