Introduction: Commercial substance and structure: Finance leases: rental profiles
Finance lease rental schedules can be structured in all kinds of ways; for example, the initial rentals could be nil or much lower than the amount needed to pay off the debt. Subsequent rentals are then correspondingly higher.
Where the initial rentals are nil (or set at an amount less than the ‘interest’ which is accruing on the ‘loan’) the lessee’s debt to the lessor increases. This led to tax planning opportunities where ‘interest’ earnings could be recognised for accounts purposes much sooner than they were taxable. Schemes which used deferred rental structures to avoid or defer tax, and the legislation enacted to counter them are described at BLM70000 onwards.
Where the rentals are set at an amount equal to the ‘interest’ on the ‘loan’ the lessee’s debt remains static and the lease is equivalent to an interest-only loan. Such a lease will, of course, contain a requirement to pay a terminal rental at the end of the lease term which will, in effect, repay the ‘loan’.
Various combinations are possible. For example, the lease might be equivalent to an interest-only loan for a few years and then become equivalent to a repayment loan for the rest of the lease term.