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.
5–10 years; commonly 7 years
Equivalent to ~9–13% APR when calculated as the IRR of the rent stream against the upfront cost the lessor incurred. Typically structured as ~£25k–£40k per year on a £200k system over 7 years.
Roughly 7% to 12% pre-tax IRR on the cumulative cash flows.
How it works
An operating lease is fundamentally a rental arrangement: someone else owns the system, you pay them to use it. The case for an operating lease over capital purchase or a green loan is narrow but real. It applies most clearly when you cannot use the tax allowances yourself — typically because you're loss-making, a charity, or a not-for-profit — but a leasing company with tax appetite can. The lessor uses the 50% FYA on your behalf, captures the value, and reflects part of that value back to you in a rent that is lower than a comparable green loan repayment would be. For a profitable, tax-paying trading company, the operating lease is rarely the best structure. The economics shift further now that IFRS 16 has tightened the off-balance-sheet treatment for larger reporters — what used to be a clean balance-sheet improvement is now mostly a P&L treatment difference. For SMEs reporting under FRS 102, the off-balance-sheet point still holds. The single biggest pitfall in operating lease term sheets is the residual position: what happens at year 7 to a system with another 18 years of useful life? A well-structured lease gives you a clear option to buy at fair market value or extend at peppercorn rent. A poorly-structured one leaves you negotiating from a weak position. We review the residual mechanics carefully before any signature.
Worked example: 250kWp on a £200,000 commercial system
£0 (some leases require 1–3 months' rent in advance)
Year-one rent ~£32k. Year-one electricity saving ~£42k. Tax saving on rent deduction ~£8k. Net year-one cash position: positive £18k.
+£700k to +£1.1m cumulative free cash flow over 25 years (lower than green loan because rent is paid for 7 years and you don't get the residual asset value monetised the same way).
Roughly 7% to 12% pre-tax IRR on the cumulative cash flows.
Best when the lessee cannot use FYA but the lessor can. The lessor's tax benefit is reflected in lower rent.
Best fit
- ● Loss-making or low-tax-paying companies (the lessor uses the FYA, you get a lower rent)
- ● Companies prioritising off-balance-sheet treatment
- ● Property owners managing covenant constraints
- ● Charities and not-for-profits without taxable profits
Not suitable for
- ○ Profitable companies that can use FYA themselves (capital purchase or green loan beats this)
- ○ Long-term occupiers wanting full residual value
- ○ Public sector under FRS 102 / IFRS 16 (lease still capitalised under modern rules)
Pros
- No upfront capital outlay
- Fixed, predictable rent payments — easy to budget
- Off-balance-sheet treatment under FRS 102 (SMEs)
- Rent fully deductible against profits
- Asset on lessor's books — no inverter replacement risk for lessee in some structures
- End-of-term options preserve flexibility
Cons
- Total cost over 25 years is higher than capital purchase or green loan
- Lessee does not claim FYA or AIA
- Requires careful drafting around lease classification (especially under IFRS 16)
- Early termination usually expensive
- Lessor approval needed for changes to the system or property
- End-of-term residual decision can be complex
Mechanics
Ownership model
The leasing company (lessor) retains legal title throughout the lease. The lessee pays rent for use of the asset over a defined term. At lease end, options typically include: purchase the asset for nominal value, extend the lease at peppercorn rent, or hand back to the lessor.
Balance sheet treatment
Under FRS 102 / FRS 105 (UK GAAP for SMEs), operating leases stay off balance sheet — only the rental expense hits P&L. Under IFRS 16 / FRS 101, all leases over 12 months are capitalised, eroding the off-balance-sheet benefit. Many private SMEs reporting under FRS 102 still get the off-balance-sheet treatment.
Tax treatment
Rent payments are fully deductible against trading profits as an operating expense. The lessee does NOT claim FYA, AIA, or capital allowances — the lessor claims those benefits and reflects the value in a lower rent. For loss-making companies, this is the structural attraction: someone with tax appetite uses the allowances on your behalf.
Who offers it
Specialist solar leasing companies, asset finance arms of major banks (Lombard, Aldermore, Close Brothers), and some manufacturer-backed leasing schemes. Term sheets vary significantly — we sense-check rate, residual treatment, and end-of-lease options before any commitment.
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.
Finance Lease
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.
Direct comparisons
Frequently asked questions
When does operating lease beat capital purchase economically?
Why is operating lease "off-balance sheet"?
Who captures tax allowances under operating lease?
How do lease termination provisions work for solar?
Can battery storage be included in operating lease?
Model Op 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.
Request a finance review