Finance Lease for Commercial Solar
Functionally similar to a loan — you pay over time, the asset hits your balance sheet, and you keep the tax benefits, but with leasing-company structure.
5–10 years; commonly 7 years
Similar to a green loan at 6.5%–9% effective rate. Often slightly higher than equivalent secured bank debt because of leasing-company margin structure, but credit appetite is sometimes broader.
Typically 10% to 16% pre-tax IRR — close to green loan economics.
How it works
A finance lease is the structurally interesting cousin of an operating lease and a loan. It looks like a lease (the lessor holds legal title, rentals are paid, end-of-term peppercorn purchase) but it functions like debt-financed ownership (the lessee captures all the tax benefits, the asset is capitalised on balance sheet, the rentals split into capital and interest portions much like a loan amortisation). The reason finance leases exist alongside loans is partly historical, partly tax-administrative, and partly about which credit team in which institution wants to write the deal. For a borrower, a finance lease and a secured green loan are economically very close — both leave you with the asset and the tax benefits, both cost roughly 6–9% effective per year, both run 5–10 years. The choice often comes down to which lender offers the better rate for your specific covenant. We treat finance lease and green loan as parallel options and quote both for any client where capital purchase isn't the chosen route.
Worked example: 250kWp on a £200,000 commercial system
£0–£15k (some lessors take 5–10% deposit; others zero)
Year-one rentals ~£28k–£32k. Year-one electricity saving ~£42k. FYA tax saving ~£25k. Net year-one cash position: positive £35k–£39k.
+£900k to +£1.2m cumulative free cash flow.
Typically 10% to 16% pre-tax IRR — close to green loan economics.
Best fit
- ● Profitable companies wanting to keep capital allowances
- ● Businesses with existing leasing relationships and committed credit lines
- ● Property owners using lease finance across other assets for portfolio reasons
- ● Companies wanting the credit underwriting handled by a leasing arm rather than a bank lending team
Not suitable for
- ○ Companies that prefer the cleaner narrative of debt finance
- ○ Smaller systems where lease admin is disproportionate
Pros
- Lessee captures all tax benefits including FYA
- Easier credit underwriting than bank debt for some borrowers
- Fixed, predictable payments
- End-of-lease ownership transfer for nominal payment
- Working capital preserved
- Lease finance arms often more solar-savvy than general business banking
Cons
- Total cost over 25 years exceeds capital purchase by the finance margin (~£70k–£100k on a £200k system)
- On-balance-sheet treatment under both FRS 102 and IFRS 16
- Early termination typically expensive
- Less consumer-protection regulation than bank debt
Mechanics
Ownership model
Mechanically, the lessor retains legal title throughout the lease, but economically the lessee carries all the risk and reward of ownership. At lease end, the lessee typically takes the asset for a peppercorn payment.
Balance sheet treatment
Capitalised on balance sheet as a right-of-use asset with a corresponding lease liability. Treated similarly to debt-financed asset purchase. Under both FRS 102 and IFRS 16, finance leases are on-balance-sheet.
Tax treatment
The lessee — not the lessor — claims the capital allowances on a finance lease. Critically, this means the 50% First Year Allowance, AIA, and ongoing writing-down allowances flow to the lessee. The interest portion of lease rentals is deductible against trading profits; the capital portion is not (capital allowances replace it).
Who offers it
Asset finance arms of major banks (Lombard, BNP Paribas Leasing, Société Générale Equipment Finance), specialist leasing companies, and manufacturer-backed schemes. Term sheets and effective rates vary widely — comparison is essential.
Compare with other finance routes
Capital Purchase
Pay cash, own the asset, claim the full tax relief — the simplest structure and almost always the most economic over 25 years.
Green Loans
Borrow against the project, retain ownership, smooth the cash impact — green loans typically charge 6–9% APR for solar specifically.
Operating Lease
The leasing company owns the system; you pay a fixed annual rent. Off-balance-sheet, fully expensable, but you don't get the FYA.
Direct comparisons
Frequently asked questions
What's the difference between finance lease and operating lease for solar?
Why choose finance lease over capital purchase?
How long are finance lease terms for commercial solar?
Can finance lease cover battery storage?
Is finance lease available to charities?
Finance lease for commercial solar — how it works
A finance lease is a leasing arrangement in which the lessee uses the solar equipment for substantially all of its useful life, bearing most of the risks and rewards of ownership, while legal title remains with the lessor (the finance provider). For accounting purposes under FRS 102 and IFRS 16, finance leases must be capitalised on the lessee's balance sheet as both an asset and a liability — distinguishing them from operating leases (off-balance-sheet) and hire purchase (title eventually transfers).
Finance lease vs hire purchase: key distinction
Both HP and finance lease are on-balance-sheet under FRS 102 / IFRS 16. The critical distinction is: under HP, the lessee claims capital allowances (FYA, AIA, WDA) since HMRC treats the HP hirer as the beneficial owner. Under a finance lease, the lessor retains legal title and claims the capital allowances — the lessee deducts the lease payments as a revenue expense (not capital allowances). For a 25% corporation tax payer with access to FYA, HP is materially more tax-efficient than a finance lease on the same asset. Finance leases are most suitable where the lessee has no capital allowance appetite (charities, public sector, loss-making entities).
Finance lease structure for commercial solar
The lessor purchases the solar equipment and leases it to the lessee for a primary term (typically the equipment's useful life — 20–25 years for solar, though commercial terms are usually 10–15 years). Primary rentals cover the full cost of the asset plus finance charge. At the end of the primary term, the lessee can continue on peppercorn rental (informal long-stop period) or arrange for the asset to be sold to a third party (the lessee typically receives 95%+ of proceeds as a rebate of rentals — a common commercial arrangement that does not affect the tax treatment).
Balance sheet treatment under FRS 102
Finance leased assets are capitalised at the lower of the fair value of the asset and the present value of the minimum lease payments. A matching finance lease liability is recognised. Depreciation is charged on the capitalised asset; interest on the lease liability is charged to the income statement separately from the repayment of principal. This treatment mirrors the economics of borrowing to purchase — the balance sheet shows the asset and the obligation to pay for it.
| Factor | Finance lease | HP | Operating lease |
|---|---|---|---|
| Balance sheet treatment | On-balance-sheet (FRS 102 / IFRS 16) | On-balance-sheet | Off-balance-sheet (if qualifying under IFRS 16) |
| Capital allowance | No — lessor claims | Yes — lessee claims (s.67 CAA) | No — lessor claims |
| FYA eligibility for lessee | No | Yes | No |
| Lease payment deductibility | Interest component deductible; not the capital repayment | HP payments comprise capital + interest; only interest deductible | Full rental payment deductible |
| Ownership at end | Remains with lessor; lessee may get proceeds share | Transfers to lessee | Remains with lessor |
Model Fin Lease alongside the alternatives
We build a side-by-side after-tax comparison across all six structures using your actual numbers — not lender brochure assumptions.
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