2 min read
What can be leased
Almost any tangible asset that retains measurable value over time can be leased: commercial vehicles, manufacturing plant, IT servers, telecoms infrastructure, medical devices, catering equipment, and specialist machinery. The range of assets covered is broader than many directors assume — if it has a resale market, a lessor can usually structure a rental agreement around it.
For broader context on asset-based finance structures including hire purchase alternatives, see our asset finance guide.
Finance lease in practice
Under a finance lease, the lessor purchases the asset and rents it to the lessee for the majority of its economic life. The lessee assumes substantially all the risks and rewards of ownership — including maintenance, insurance, and obsolescence risk — without holding legal title. Under IFRS 16 and FRS 102, finance leases are recognised on the balance sheet as a right-of-use asset and a corresponding lease liability.
At the end of the primary term, a common arrangement is for the lessee to act as agent in selling the asset on behalf of the lessor, retaining the majority of the net sale proceeds as a rental rebate. This effectively passes residual value back to the lessee.
Operating lease in practice
An operating lease runs for a period shorter than the asset's full economic life. The lessor bears the residual-value risk and expects to sell or re-lease the asset at term end. Rental payments are typically lower than under a finance lease for an equivalent asset because the lessor's return includes the anticipated residual value.
IFRS 16 brought most operating leases onto the balance sheet for companies reporting under IFRS, removing the off-balance-sheet benefit that was historically attractive. However, short-term leases (under 12 months) and low-value asset leases retain exemptions under IFRS 16 and may be expensed directly through profit and loss.
Tax and accounting considerations
Under a finance lease, the lessee may be entitled to claim capital allowances on the asset if it is treated as the economic owner for tax purposes — though the position depends on the specific lease terms and HMRC guidance applicable at the time. Rental payments on operating leases are generally deductible as a business expense.
Directors should take independent accountancy advice before choosing a lease structure on the basis of its stated tax treatment, as the interaction between accounting standards and tax rules is nuanced and can change.
All figures and ranges above are illustrative only and do not constitute a quote or offer.
Frequently asked questions
Can I upgrade equipment during a lease term?
Some lessors offer technology refresh or upgrade provisions, particularly in IT and telecoms leasing. These allow the company to swap to newer equipment mid-term, typically by rolling the existing rental commitment into a new agreement. The terms of any upgrade clause should be checked carefully at the outset.
What happens at the end of a lease?
Options typically include returning the asset, extending the lease at a reduced peppercorn rent, or (for finance leases) facilitating the sale of the asset with the lessee receiving most of the proceeds. The specific end-of-term options will be set out in the lease agreement and should be reviewed before signing.
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