Guide

Decide whether to lease or buy assets

Types of leasing

There are different kinds of lease arrangements. It makes sense to consider them all to see which is best suited to your business, your particular circumstances and the asset that you are acquiring.

The three main types of leasing are finance leasing, operating leasing and contract hire.

1. Finance leasing

  • A long-term lease over the expected life of the equipment, usually three years or more, after which you pay a nominal rent or can sell or scrap the equipment - the leasing company will not want it any more.
  • The leasing company recovers the full cost of the equipment, plus charges, over the period of the lease.
  • Although you don't own the equipment, you are responsible for maintaining and insuring it.
  • You must show the leased asset on your balance sheet as a capital item, or an item that has been bought by the company.
  • Leases of over seven years, and in some cases over five years, are known as 'long funding leases' under which you can claim capital allowances as if you had bought the asset outright.

For detailed guidance on tax and leasing, see acquire assets and borrow money tax efficiently. You can also read HM Revenue & Custom's Business Leasing Manual.

2. Operating leasing

If you are considering operating leasing, remember the following points:

  • it is useful if you don't need the equipment for its entire working life
  • the leasing company will take the asset back at the end of the lease
  • the leasing company is responsible for maintenance and insurance
  • you don't have to show the asset on your balance sheet

3. Contract hire

Contract hire is often used for company cars and:

  • the leasing company takes some responsibility for management and maintenance, such as repairs and servicing
  • you don't have to show the asset on your balance sheet