Finance Lease is a popular and tax efficient funding option for businesses when Contract Hire is not suitable.
This is a finance based product constructed in a similar way to Contract hire, except it can include a “Balloon” (Residual value) which must be either settled or re-financed at the end of the contract term. The balloon amount is calculated on c. 90% of the future value (based on term and mileage). It appears on a company’s balance sheet as a “Leased asset”.
At the end of the contract period, you have options;
If you wanted to keep the vehicle;
Balloon payment – You may wish to pay the balloon payment. This is collected by Direct Debit unless you advise otherwise. After this is paid you can continue to use the vehicle, although you will not actually own it. The leasing company will maintain the agreement by invoicing you for a secondary “Peppercorn” rental amount paid annually in advance. The annual peppercorn will continue to be taken until you sell the vehicle (and advise the funder accordingly).
You can also re-finance the balloon for a further period. This should be arranged no later than 28 days from the planned conclusion date.
If you want to sell the vehicle, you would do so as the funders’ appointed agent. It must be sold to a party that is not the hirer of the vehicle, or a related company, director, partner or family member. The finance company will require a copy of the VAT Sales invoice and c. 2.5% of the sales proceeds.
This article provides general information to be used for your reference only and is not intended as a substitute for financial advice specifically directed at your business and taking account of the particularities of your situation.