A lease whereby the Lessor purchases the asset on the customer’s behalf and the customer pays rentals for the benefit of the asset over its useful life and the majority of the sales proceeds at the end of the lease are passed back to the customer.
Finance lease transfers substantially all of the risks and rewards of ownership of the asset to the customer. It is assumed that such a transfer of risks and rewards occurs if at the inception of the lease the present value of the minimum lease payments including any initial payment, amounts to substantially all (normally 90% or more) of the fair value of the leased asset. The present value should be calculated by using the interest rate implicit in the lease.
The term can be equal but no longer than the useful economic life of the asset and it can amortise to a balloon value at the end of the term.
At the end of the primary lease term the customer can either:
- Retain use of the asset by entering into a secondary period and paying peppercorn rentals at a nominal amount, or
- Sell the asset as agent of the Lessor and receive the majority of the sale price, or
- Return the asset to the Lessor
Benefits of finance lease are:
- The customer has the benefits of operating the asset for a periodic rental without the responsibility of owning it.
- The majority of the sale proceeds at the expiry of the lease are passed back to the customer.
- Fixed monthly cost with no VAT payable on the purchase cost of the asset and no initial capital outlay, improving the customer’s cash flow. VAT is payable on the rentals only.
- Part of the rentals can be offset against taxable profits.
- Capital allowances claimed by the Lessor and passed back to the Lessee by a reduction in rentals, unless the lease is a long funding lease whereby the customer can claim the capital allowances.
Ibex Finance has experience in arranging finance leases for most assets across a wide range of sectors.
A master agreement can be arranged by Ibex Finance with agreed terms and conditions between the Lessor and the customer for all future equipment or vehicles to be leased. A schedule to the master agreement is then drawn up for each requirement over a fixed term.