Should you buy or lease your next car?

One of the questions that accountants are asked most frequently when one of our clients is buying a new car, is whether to buy or to lease.

To “buy” means that ownership passes from a seller (usually a dealer) to a purchaser (you/your company). This can be: 1) paying in cash (paying the whole purchase price upfront), OR 2) taking finance in which ownership passes. These types of finance have different names, the most common ones being hire-purchase agreements or lease-purchase agreements.

As long as ownership passes, to the extent that any tax allowances involved in the purchase are available, these can be claimed by the purchaser, generally in the first year, because you own the vehicle.

To “lease” means that ownership does not pass from a seller to a purchaser. The payments that you make each month are effectively rentals and at the end of the lease term, you return the car to the leasing company, or have options to purchase or re-lease. At no time during the lease term do you have any investment/equity/ownership in the vehicle.

If ownership doesn’t pass, any capital tax allowances involved in the purchase cannot be claimed by the purchaser, these are instead claimed by the leasing company as the owner of the vehicle. You as the renter of the vehicle, to the extent that tax allowances are available, claim a tax deduction just on the lease rentals as they are paid each month.

It can be difficult to work out whether you are buying the vehicle or renting it. Questions that you can ask to understand the answer include:

  • “Does ownership pass to me/my company at the beginning?” If yes, you’re generally buying the vehicle.
  • “What happens at the end of the finance term?” If the answer is “The vehicle is yours”, you’re generally buying the vehicle. If the answer is that you’ll need to return the vehicle, or look at new financing options, that would generally indicate that you’re renting the vehicle.

So, what’s the best thing to do: Buying or renting a car?

From a tax point of view, measured over the whole period of use of the vehicle, the tax allowances end up being about the same. However, if you “buy” the vehicle you’ll get greater tax allowances at the beginning, and less later on; with a “lease” the allowances are more evenly claimable over the lease term.

The question, really, isn’t so much one about tax when buying or renting a car; it’s more about how a car fits in with your lifestyle. Here at Figurit, we are dental and medical accountants assisting with forecasting, financial planning, bookkeeping and much more. If we can help you, please get in touch.

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