Capital purchase vs finance lease — UK commercial solar 2026
Capital purchase and finance lease are economically similar — both keep tax allowances with you and ownership effectively flows your way. The difference is timing of capital outlay (upfront versus monthly over 8 years) and the cost of that timing flexibility (typically £30-50k of finance charges over 8 years).
Headline answer
Capital purchase wins on lifetime cost by £30-50k over a 7-8 year horizon. Finance lease wins on capital preservation — no upfront outlay, fixed monthly cost integrated into operating budget. Choose based on whether £200k of capital is more valuable in solar (capital purchase) or held against other priorities (finance lease).
Side-by-side
| Criterion | Capital purchase | Finance lease |
|---|---|---|
| Upfront capex | £200k | £0 |
| Monthly payment | None | £2,777 over 96 months (8-year term, 7.5% APR) |
| Total payments | £200k | £266,592 over 8 years |
| Finance cost | £0 | £66,592 over 8 years (£50k after-tax) |
| FYA capture | Yes — year 1 | Yes — year 1 (lessee captures) |
| Special-rate pool | Yes — 6% writing-down | Yes — 6% writing-down |
| Asset on balance sheet | Yes (full ownership) | Yes (capitalised under FRS 102 full / IFRS 16) |
| Ownership at end of term | Always (year 0) | Lessee option to acquire at nominal value |
| 25-year cumulative | £1.05m | £986k |
| Best for | Available capital + low alternative use return | Capital preservation priority + cash flow predictability |
Which one for which situation
Is your £200k of capital more productive in solar than in your operating business?
Solar capital purchase delivers ~14-18% lifetime IRR for profitable trading companies (after-tax). If your operating business deploys capital at higher rates (16%+ post-tax), keep capital available for that and finance the solar. If operating business yields are lower, deploy capital in solar.
Do you have working capital seasonal or strategic constraints?
Lumpy capex (£200k cash outflow) can pressure working capital around year-end or strategic acquisition windows. Finance lease smooths capex into £2,777/month operating expense — easier to absorb in operating budget. Worth £30-50k of finance cost on most operating businesses to preserve flexibility.
Are your covenant ratios tight on senior debt?
Finance lease (under FRS 102 full / IFRS 16) creates a balance sheet liability similar to debt. Some loan covenants treat lease obligations as debt-equivalent. Capital purchase (paid from cash) doesn't add liabilities. For covenant-constrained operators, capital purchase may be cleaner than adding finance lease obligations.
Does your accounting framework recognise lease liabilities (IFRS 16 / FRS 102 full)?
Modern accounting frameworks (IFRS 16, FRS 102 full) recognise finance lease obligations as on-balance-sheet liabilities. Older / smaller-entity FRS 102 reporting may keep finance lease obligations off-balance-sheet, although this is becoming rare. Confirm with your accountant whether finance lease creates a recognised liability in your specific reporting framework.
Capital purchase vs Finance lease FAQs
Is the FYA tax saving the same on capital purchase and finance lease?
Can I structure a partial capital purchase + partial finance lease?
Why is finance lease typically more expensive than green loan?
Does finance lease have any advantage over green loan?
Can I terminate a finance lease early?
Related comparisons and finance pages
Ownership vs long-term rental: a fundamental distinction
Capital purchase and finance lease reach very different destinations. A capital purchase means your business owns the solar installation outright from day one. A finance lease means a finance company owns the panels and rents them to you for a fixed term — and you may never acquire legal title, even after all payments are made.
This distinction drives major differences in tax treatment, balance sheet classification, long-term economics, and what happens at the end of the term. Understanding both is essential before committing to a funding route.
How capital purchase works
Your business pays the full system cost (typically from reserves, or funded by a green loan that you repay separately). You own the asset from installation. It appears on your balance sheet as plant and machinery. You claim AIA in year one, offsetting up to £1m against taxable profits. You receive all SEG export payments. You bear all maintenance costs.
Capital purchase tax position
AIA deduction of 100% in year 1 (up to £1m). For a £300,000 system: £75,000 Corporation Tax saving at 25%. The system then sits at nil book value (fully written down) while continuing to generate income for 20+ years.
How a finance lease works
A finance company purchases the solar installation and leases it to your business for a term typically matching the system useful economic life (10–20 years). Monthly rentals are calculated to recover the asset cost plus a return for the lessor. At end of term, you typically have the option to extend for a peppercorn rent, but legal ownership may remain with the lessor.
Finance lease tax position
Rental payments are deductible as a business expense. Under IFRS 16, finance leases are on-balance-sheet: you recognise a right-of-use asset and depreciate it over the lease term, plus a lease liability. You cannot claim AIA (the asset is not owned by you for Capital Allowances purposes).
Finance lease characteristics
No upfront capital outlay, fixed monthly rentals, asset on balance sheet as right-of-use, no AIA, depreciation charge replaces Capital Allowances, lessor retains legal title throughout.
The AIA advantage is significant
This is the biggest practical difference. AIA allows capital purchase buyers to deduct 100% of the system cost against taxable profits in year one. A finance lessee deducts only their annual depreciation charge — typically 5–10% of system cost per year.
| Tax comparison | Capital Purchase | Finance Lease |
|---|---|---|
| Year 1 AIA deduction | 100% of £300,000 = £300,000 | nil (no Capital Allowances) |
| Year 1 CT saving (25%) | £75,000 | nil (depreciation only) |
| Year 1 depreciation deduction | N/A (AIA taken) | £15,000 (5% of £300,000) |
| Year 1 CT saving from depreciation | N/A | £3,750 |
| Total year 1 tax benefit | £75,000 | £3,750 |
| Year 1 cash flow advantage (capital purchase) | £71,250 more tax saving | — |
Balance sheet comparison
| Balance sheet item | Capital Purchase | Finance Lease (IFRS 16) |
|---|---|---|
| Asset recorded | Plant and machinery at cost, written down via AIA | Right-of-use asset at present value of lease payments |
| Liability recorded | None (if self-funded) | Lease liability at present value |
| Gearing impact | None (if self-funded) | Increases debt ratios |
| Depreciation charge | Via AIA in year 1 (not income statement) | Annual depreciation over lease term |
| Interest charge | None | Finance charge on lease liability each year |
End-of-term position
At the end of a capital purchase, you own a fully depreciated asset that continues to generate electricity for 10–15 more years with no finance cost — pure profit. At the end of a finance lease, the lessor owns the asset. You may be able to extend at peppercorn rent, but this must be negotiated and is not guaranteed.
The long-term economics strongly favour capital purchase once the asset remaining operational life is considered. A 300kWp system installed in 2025 will still be generating meaningful electricity in 2050. Every year after the capital purchase is repaid is pure cash generation. Every year of a finance lease is still a rental obligation.
When finance lease makes sense
Balance sheet constraints
If your company has specific debt-to-equity covenants that restrict additional borrowing, structuring solar as a finance lease may fit your covenant framework while keeping the asset in use.
Capital budget restrictions
In sectors with strict capital expenditure approval processes (NHS, local government), an operating or finance lease may be classified as revenue expenditure, bypassing capital budget governance.
Shorter planning horizons
If you plan to vacate premises within 10 years and cannot commit to ownership, a lease term that matches your occupancy plan may be more appropriate than purchasing an asset you will leave behind.
Need this comparison run on your specific numbers?
We model both structures side-by-side using your postcode, half-hourly demand profile, accounting position, and balance sheet preferences. Five working days from enquiry to indicative comparison.
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