What is a finance lease? How it works for business equipment

A finance lease is a way to fund business equipment where the leasing company (the lessor) buys the asset you choose and rents it to your business (the lessee) for most of its useful life. The rentals are set so that, over the lease, the lessor gets back almost all of what it paid plus its charges. The Finance & Leasing Association, the industry trade body, describes the lessee paying at least 90% of the asset’s fair value.

Lombard, NatWest Group’s asset finance brand, puts it this way on its own site: the lessor keeps legal title but is “in effect financing the lessee’s purchase of the leased asset”, and the agreement counts as a lease of this kind when most of the risks and rewards of ownership pass to the business. In practice you look after the asset as if you owned it: Lombard says customers are responsible for maintenance and repairs, and the FLA says the rights and obligations of ownership, such as maintenance and insurance, pass to the lessee.

A finance lease is one of the main forms of asset finance. If you are weighing it against renting kit for a shorter period, our comparison of finance leases and operating leases sets the two side by side.

1. You choose the asset and supplier. The leasing company buys it and owns it.
2. You pay rentals in the primary period. These are usually fixed and monthly, and between them cover most of the asset’s cost plus the lessor’s finance charges. Lloyds Bank, for example, publishes finance leases over 12 to 60 months funding up to 100% of the price.
3. You run the asset. Maintenance, repairs and insurance are your responsibility.
4. The primary period ends. You choose what happens next, within the options the agreement allows.

The end-of-term options lessors publish fall into three groups:

• Carry on leasing. A secondary period on a much smaller rental. Kingsley Asset Finance describes keeping the asset for an annual rental; PEAC Solutions describes continuing to lease for nominal annual rentals. Lombard calls this the continuing lease period and says a lease rolls into it if you make no choice.
• Sell it and share the proceeds. You sell the asset to a third party on the lessor’s behalf. Lombard says you then receive a fixed percentage of the net proceeds, set out in your agreement; Haydock Finance describes receiving a rebate from the proceeds.
• Hand it back. Return the asset to the lessor for resale. Lombard asks for at least 30 days’ notice before the maturity date if you want to stop leasing.

Take a £40,000 machine on a five-year finance lease. The figures are round numbers to show the mechanics, not a quote or a market rate.

In this example the £8,000 you pay over £40,000 is the cost of the finance. Every lessor prices differently, and fees such as documentation charges are added, so compare offers on the total payable.

VAT is charged on each rental rather than on the full price at the start. HMRC’s VAT manual explains that where any option to buy at the end costs as much as or more than the asset’s expected market value, the supply is one of leasing services and the whole of each instalment is subject to VAT. GOV.UK gives the standard rate as 20%.

That spreads the VAT across the agreement. Hire purchase is different: where the option payment is small and ownership is clearly meant to pass, the same HMRC manual treats the deal as a supply of goods. A VAT-registered business can usually reclaim VAT on equipment used for the business. Cars are an exception: Lombard notes that you may be able to recover only some of the VAT on vehicle lease rentals, and says to take advice from your accountant.

For tax, GOV.UK says you cannot claim plant and machinery capital allowances on things you lease, because you must own them, unless you have a hire purchase contract or a long funding lease. Whether a lease is a long funding lease is a technical test for your accountant. Our guide to capital allowances covers the basics.

For company accounts, the FRC’s amendments to FRS 102 remove the distinction between operating and finance leases for lessees, for accounting periods beginning on or after 1 January 2026. Most leases now go on the balance sheet as an asset and a liability, as finance leases already did. Short-term and low-value leases can stay off the balance sheet.

Our guide to hire purchase covers the ownership route, and hire purchase vs leasing helps you choose between them.

A finance lease suits equipment you expect to use for most of its working life, where owning it outright matters less than keeping cash in the business and spreading VAT. It fits less well for kit you will want to swap in two or three years, which is what operating leases and contract hire are designed for.

• You are committed for the primary period. Ask in writing what you would owe if you needed to end the agreement early.
• The lessor owns the asset. If rentals are missed, the asset it owns is its security.
• Running costs are yours. Budget for maintenance, repairs and insurance on top of the rentals.
• End-of-term terms differ. Check the secondary rental, the notice period and your share of any sale proceeds before you sign.

Banks and independent finance houses both offer finance leases. Profiles in the Capzy lender directory include Davenham Asset Finance, which describes fixed monthly rentals in a primary period followed by a secondary rental or sale to a third party; Haydock Finance; Kingsley Asset Finance; Lloyds Bank; and PEAC Solutions. Our list of asset finance companies sets out more providers’ published terms.

Capzy is a credit broker, not a lender, and is paid by the lender. You can check your options with a soft search that does not affect your credit score; a lender’s full application may use a hard search, and any lease is subject to status and lender criteria.