Lease Rental Versus Outright Purchase – A Worked Example

Quick Benefits of Lease Rental for Businesses residing in the United Kingdom:

• Tax relief – Rentals are 100% allowable against taxable profits (see example below)

• Option to take ownership of / title of proposed products

• Preserve other credit facilities

• No capital expenditure – rentals payable monthly

• Fixed Term (allows effective budgeting)

• Fixed payments

• Ability to add / upgrade products

Leasing vs Outright Purchase – Worked Example
Lease finance is the most effective way to acquire any new equipment as a result of the tax allowances that apply with this type of acquisition. Below is an illustration based on a 3 year lease agreement showing that, once tax relief is taken into account, the total amount paid can be less than buying the equipment outright:

Invoice Value: £10,000
Monthly Rental: £336.00
Total cost of Rentals: £12,096
Tax relief at 20% of Total cost: £2,419.20
Total cost after tax relief: £9,676.80

Lease Rental
Yr 1 – £4,032 (100% of rentals)
Yr 2 – £4,032 (100% of rentals)
Yr 3 – £4,032 (100% of rentals)
_________
Tax Relief Via Leasing: £2,419.20

Outright Purchase
Yr 1 – £4,000 40% of purchase price
Yr 2 – £1,500 25% of reduced value
Yr 3 – £1,125 25% of reduced value
________
Tax Relief Via Purchase: £1,325.00

This is a simple yet useful worked example that demonstrates the typical UK tax relief that is available via taking the leasing route to acquire new equipment for your business, compared to the UK tax relief available on outright purchase. This demonstration is based on the tax percentages currently in place in the United Kingdom and should be used only as an example. You should speak to your accountant to discuss your own personal business circumstances to see which is the most beneficial route for you.