Finance Lease
- Rated 4.9/5 on Feefo
- FCA authorised, FRN 315268
- BVRLA leasing broker member
- Part of Global Vehicle Group
A finance lease lets your business use a vehicle without buying it, while keeping the risk and the reward of what it is worth at the end. You pay rentals over an agreed term, usually with a larger final payment, and when the agreement ends the vehicle is sold and your business keeps most of the proceeds. It is the agreement of choice for vehicles that will be modified, worked hard, or driven further than a contract hire funder would accept.
Key facts
- The funder owns the vehicle. Your business uses it and carries the risk on its end value.
- No mileage limit and no damage charges. The vehicle is not being handed back to a funder who needs to resell it in a particular condition.
- Most agreements carry a larger final rental, often called a balloon, set against what the funder expects the vehicle to be worth.
- At the end the vehicle is sold to a third party. Your business usually receives most of the sale proceeds as a rebate of rentals. You cannot buy it yourself.
- VAT is charged on each rental rather than on the full price up front, which helps cash flow. Recovery is 50% on cars, 100% on commercial vehicles.
- Rentals are a trading expense. Cars above 50g/km CO2 carry the flat 15% disallowance; at or below, full relief.
- Modifications are permitted. Tipper bodies, refrigeration, racking, cranes and livery are all normal on a finance lease.
- From January 2026, finance leases and contract hire are treated the same way on the balance sheet. The old accounting distinction has gone.
How a finance lease works
A funder buys the vehicle you have specified and leases it to your business for an agreed term. You pay an initial rental, then monthly rentals, and in most cases a larger final rental at the end.
That final rental is the important part. It is set against what the funder expects the vehicle to be worth when the agreement finishes. A higher final rental means lower monthly payments, because less of the vehicle's value is being repaid during the term. A lower final rental means higher monthlies and less exposure at the end.
Where a finance lease differs fundamentally from contract hire is who carries the risk on that end value. On contract hire, the funder does. On a finance lease, your business does. If the vehicle sells for more than the final rental, you benefit. If it sells for less, you make up the difference.
That single difference explains almost everything else about the agreement, including why there is no mileage limit and no end-of-contract damage charge. The funder is not planning to resell the vehicle for its own account, so it has no reason to police how you use it.
What happens at the end, and why you cannot buy the vehicle
When the agreement finishes, the vehicle is sold to a third party. Your business normally acts as the funder's agent in arranging that sale, and receives the great majority of the sale proceeds back as a rebate of rentals.
You cannot simply buy the vehicle yourself. If a lease agreement gives the lessee the right to acquire the asset, it stops being a lease and becomes something closer to a hire purchase or conditional sale, with different VAT and tax consequences for both parties. Funders therefore structure finance leases so that title passes to an unconnected third party.
The alternative to selling is a secondary rental period. Rather than disposing of the vehicle, you continue to use it for a further term at a much reduced annual rental. For a business running vehicles for six, seven or eight years, this is often the better outcome and it is worth asking about at the outset rather than at the end.
The January 2026 change, and why it matters less here
For years, the standard way to choose between contract hire and a finance lease was accounting treatment. Contract hire was an operating lease and stayed off the balance sheet. A finance lease went on it. Businesses that cared about gearing chose contract hire on that basis alone.
Following the Financial Reporting Council's 2024 periodic review, FRS 102 Section 20 was rewritten. For accounting periods beginning on or after 1 January 2026, lessees no longer distinguish between operating and finance leases. Most leases of either kind are recognised on the balance sheet as a right-of-use asset with a corresponding lease liability.
The practical consequence is worth stating plainly. The main accounting reason to prefer contract hire over a finance lease has gone. Both now appear on the balance sheet, both produce depreciation and interest rather than a straight rental charge, and both affect gearing in a similar way.
That does not make the two agreements the same. It means the choice between them is now a commercial one rather than an accounting one, and it comes down to three questions:
- Do you want to carry the risk on what the vehicle is worth at the end? Finance lease yes, contract hire no.
- Can you predict your mileage? If not, a finance lease has no mileage limit to breach.
- Will the vehicle be modified? If yes, a finance lease is usually the only realistic option.
Micro-entities reporting under FRS 105 sit under a different standard and are not affected in the same way. Companies already reporting under IFRS 16 have had leases on the balance sheet since 2019. Your accountant can tell you which regime applies to your company.
Finance lease against contract hire, the decision most businesses actually face
| Finance lease | Contract hire | |
|---|---|---|
| Risk on end value | Your business | The funder |
| Mileage limit | None | Yes, with excess charges |
| End-of-term damage charges | None | Yes, beyond fair wear and tear |
| Modifications allowed | Yes | Rarely |
| Balance sheet, from Jan 2026 | On | On |
| Benefit from a strong resale | Yes, via rebate | No |
| Exposed to a weak resale | Yes | No |
| Keep the vehicle long term | Yes, secondary rental | No, it goes back |
VAT on a finance lease
VAT is charged on each rental as it falls due, rather than on the whole purchase price at the outset. For a business acquiring several vehicles, that difference in timing is often the reason a finance lease is chosen over outright purchase.
| What you are leasing | VAT recoverable on the rental |
|---|---|
| Car with any private use | 50% |
| Car used solely for business | 100%, depending on circumstances |
| Van, single-cab pickup or other commercial vehicle | 100% |
| Double-cab pickup, payload one tonne or more | 100%. Payload is still the VAT test |
| Maintenance element, quoted separately | 100% |
Corporation tax, and the pickup trap
Finance lease rentals are a trading expense, deducted against taxable profits. The same restriction applies as on contract hire: cars at or below 50g/km CO2 attract relief on the full rental, cars above that carry a flat 15% disallowance so you deduct 85%. Vans and single-cab pickups are unrestricted.
Double-cab pickups changed in April 2025 and this catches people out. Payload used to be the test, and it worked the opposite way round to most people's instinct: a payload of one tonne or more made it a van, which was the favourable outcome. Since 1 April 2025 for corporation tax and 6 April 2025 for income tax, payload is no longer the test for direct tax at all. Vehicles are assessed on primary suitability, and because a double-cab carries people and goods equally well, most are now treated as cars. The 15% restriction applies to them, and they no longer qualify for the Annual Investment Allowance.
VAT is the exception: payload remains the VAT test, so a double-cab with a payload of one tonne or more still carries full VAT recovery. Two tests, two different answers, on the same vehicle.
If you ordered a double-cab before 6 April 2025, the previous treatment continues until the earlier of disposal, lease expiry or 5 April 2029. Anything already on your fleet is protected.
Because the funder owns the vehicle, your business does not claim capital allowances on a finance lease. You deduct the rentals instead. If capital allowances matter, hire purchase puts the asset on your books and makes them available to you. Current rates and thresholds are in our company car tax guide.
Where a finance lease is clearly the right answer
Vehicles that will be modified. Tipper bodies, refrigeration units, racking, cranes, tail lifts, specialist livery. A contract hire funder is planning to resell the vehicle and will not accept it back cut about. On a finance lease the vehicle is yours to specify and yours to sell.
Unpredictable or very high mileage. There is no mileage limit and no excess charge, so a vehicle that might do 15,000 miles or might do 45,000 carries no penalty either way.
Vehicles you intend to keep a long time. The secondary rental period lets you run a vehicle well beyond the initial term at a much reduced cost.
Vehicles that hold their value unusually well. If you believe a vehicle will be worth more at the end than the funder has assumed, a finance lease lets your business keep that upside rather than handing it to the funder.
Unusual or specialist vehicles that funders will not write standard contract hire against.
When a finance lease is the wrong answer
We would rather say this before you sign.
A finance lease is usually wrong if you want a genuinely fixed, known total cost with no exposure at the end. The residual risk sits with you, and if the used market moves against you, you make up the shortfall. For a business that values certainty above all, contract hire does that job better.
It is also the wrong answer if you want to own the vehicle outright at the end. You cannot buy it. If ownership is the point, look at hire purchase.
And it is rarely the right choice for a single company car for a director who changes vehicle every three years. That is what contract hire is built for.
How the five agreements compare
| Finance lease | Contract hire | Hire purchase | PCH | PCP | |
|---|---|---|---|---|---|
| Who it is for | Business | Business | Business or personal | Personal | Personal |
| Do you own it? | No | No | Yes, at the end | No | Optional |
| Resale risk | You | Funder | You | Funder | Funder, if you hand back |
| Regulated credit? | No | No, consumer hire | Yes | No, consumer hire | Yes |
| Capital allowances | No, rentals deducted | No | Yes | n/a | n/a |
| Mileage limit | No | Yes | No | Yes | Yes |
| End of term | Sold, you keep most proceeds | Hand back | You own it | Hand back | Buy, hand back or part-exchange |
Read the detail on contract hire, hire purchase, personal contract hire and personal contract purchase.
If the residual risk is what puts you off a finance lease, business contract purchase shifts it back to the funder while still giving your company the capital allowances.
How Intelligent Vehicle Finance arranges it
Intelligent Vehicle Finance is a credit broker. We do not lend and we do not own the vehicles. We take your requirement, compare it across our funder panel, and set the options out in writing so you can compare like with like.
On a finance lease the two numbers that matter most are the final rental and what the vehicle is realistically worth at the end. A funder who sets the final rental high will show you an attractive monthly figure and leave you more exposed later. We will show you both, and tell you where we think the residual assumption is optimistic.
Intelligent Vehicle Finance is also part of Global Vehicle Group, whose brands have funded more than 70,000 vehicles, so behind the personal service sits genuine group scale.
Speak to us on 01752 429950, or request a callback.
Frequently asked questions
Can I buy the vehicle at the end of a finance lease?
No. If a lease gave the lessee the right to acquire the asset it would stop being a lease and would be treated more like a hire purchase or conditional sale, with different VAT and tax consequences. The vehicle is sold to an unconnected third party instead, and your business normally receives the great majority of the sale proceeds back as a rebate of rentals. If ownership is what you want, hire purchase is the agreement designed for it.
Is a finance lease still on the balance sheet?
Yes, and so is contract hire now. For accounting periods beginning on or after 1 January 2026, amendments to FRS 102 Section 20 removed the distinction between operating and finance leases for lessees, and most leases of either type are recognised as a right-of-use asset with a corresponding lease liability. The accounting difference between the two agreements has largely gone. Micro-entities under FRS 105 are subject to a different standard.
What is the final rental, and what happens if the vehicle sells for less?
The final rental, often called a balloon, is a larger payment at the end of the agreement set against what the funder expects the vehicle to be worth. Because your business carries the residual risk, if the vehicle sells for less than that figure you make up the shortfall. If it sells for more, you keep the benefit through the rebate. A higher final rental reduces your monthly payments but increases your exposure at the end.
Is there a mileage limit on a finance lease?
No, and there are no end-of-contract damage charges either. The funder is not planning to resell the vehicle for its own account, so it has no reason to restrict how you use it. That makes a finance lease well suited to businesses whose mileage is unpredictable or high.
Can I modify a vehicle on a finance lease?
Yes. Tipper bodies, refrigeration units, racking, cranes, tail lifts and livery are all normal. This is one of the main reasons commercial vehicle operators choose a finance lease, because a contract hire funder will not usually accept back a vehicle that has been modified.
How does VAT work on a finance lease?
VAT is charged on each rental as it falls due rather than on the full purchase price at the start, which helps cash flow. Recovery is usually 50% on a car with any private use, up to 100% on a car used solely for business depending on circumstances, and 100% on a van, single-cab pickup or other commercial vehicle. A separately quoted maintenance element also carries 100% recovery.
What is a secondary rental period?
Instead of selling the vehicle at the end of the initial term, you continue using it for a further period at a much reduced annual rental. For a business that runs vehicles for six, seven or eight years this is often better value than replacing them, and it is worth discussing at the outset rather than at the end.
Are double-cab pickups still treated as vans on a finance lease?
For VAT, yes. Payload remains the VAT test, so a double-cab with a payload of one tonne or more still carries full VAT recovery on the rental. For benefit-in-kind, capital allowances and the 15% lease rental restriction, no. Since April 2025 those follow primary suitability rather than payload, and most double-cabs are treated as cars. Vehicles ordered before 6 April 2025 keep the previous treatment until disposal, lease expiry or 5 April 2029.
Tax and accounting treatment depends on individual circumstances and on rates and thresholds set by HMRC, which can change at future Budgets. This page is general information, not tax or accounting advice. Please speak to your accountant about your company's position. Intelligent Vehicle Finance is a credit broker, not a lender, and receives a commission from the lender or funder when an agreement completes. A trading style of XLCR Vehicle Management Ltd, authorised and regulated by the Financial Conduct Authority (FRN 315268). Subject to status and availability. Reviewed by Stacey Smith, Brand Director, Intelligent Vehicle Finance. Last updated: July 2026.