Long Funding Lease Solar: Who Claims the Allowances

Quick answer: On an ordinary solar lease the funder owns the system and claims the capital allowances, and you deduct the rentals. A long funding lease reverses that: the lessee is treated as the owner and claims the allowances instead. Whether a lease is one turns on two questions, whether it is a funding lease at all and whether it is longer than the seven-year short-lease line. Get it wrong and the lease either loses the allowance you priced in or leaves two parties claiming relief on one asset.

Most guides to commercial solar lease finance say “the lessor claims the allowances” and stop there. That is true for the common operating lease. It is not true for every long finance-type lease, and a solar system is exactly the kind of long-lived asset on which the rules bite. This guide sets out the tests, with sources, so you can ask the right questions of the funder and your accountant. For the wider comparison of who claims under each route, see the capital allowances guide and hire purchase against finance lease.

The two-step test

Step 1: is it a funding lease? HMRC’s Capital Allowances Manual (CA23830, last updated 8 July 2025) defines a funding lease as a plant or machinery lease that meets at least one of three conditions when it begins:

1. it is accounted for as a finance lease in the accounts of the relevant person (for the lessor, in the accounts of anyone connected with the lessor);
2. the net present value of the minimum lease payments is more than 80% of the asset’s fair value; or
3. the lease term is more than 65% of the asset’s remaining useful economic life.

Fair value here is market value less any grants received towards the asset’s purchase or use. That detail matters for solar, because a grant-funded system has a lower fair value and so a lower threshold for the 80% test. See does a grant reduce capital allowances for the grant side.

Step 2: is it a short lease? A long funding lease is a funding lease that is not a short lease (and is not one of a few excluded categories such as ship leases and some leases of background plant for a building). Under section 70I(2) of the Capital Allowances Act 2001, a lease whose term is seven years or less is a short lease. Three anti-avoidance exceptions stop a lease being short: connected leases whose combined terms exceed seven years, a lease and finance leaseback arrangement, and a sale and finance leaseback.

One practical warning. The HMRC manual page cited above, as read on 18 October 2026, still describes a five-year test with a conditional five-to-seven-year band, while the Act as published on legislation.gov.uk gives the single seven-year line. The two sources do not agree, so have your accountant check the current wording of the Act against your lease before relying on either.

What changes if it is a long funding lease

HMRC’s overview (CA23805) says the lessee under a long funding lease can claim plant and machinery allowances instead of the lessor, provided the lessor is not claiming capital allowances on the asset. The lessee is treated as the owner and as having incurred the capital expenditure. The lessor, if it had treated the expenditure as qualifying, must bring a disposal value into account when it leases the asset out under a long funding lease.

For a solar system, which is special-rate plant, that means the business would claim the relief that an owner claims, rather than relying on the funder to pass some of the benefit back through lower rentals. Which allowance is available in practice depends on the structure and the business, so do not assume the Annual Investment Allowance applies without checking.

Three conditions from the manual decide whether the treatment actually applies:

• The lessee has to elect by filing. A lessee cannot treat a lease as a long funding lease unless its return for the period covering the start of the lease is made on that basis.
• The tests are independent. The lessor and lessee apply the tests separately, so a lease can be long funding for one and not the other. Settle which treatment the funder is using in the agreement.
• Hire purchase is outside it. The definition of a funding lease excludes hire or lease purchase leases to which section 67 of the 2001 Act applies, and under hire purchase the buyer is treated as the owner anyway. See solar hire purchase.

A worked illustration

The figures below are arithmetic for illustration, not a quote. Take a system with a fair value of £160,000 and a funder offering a 10-year lease. Suppose the present value of the minimum lease payments, discounted as the accounts require, comes to £140,000. That is 87.5% of fair value, above the 80% line, so it is a funding lease. A 10-year term is above seven years, so it is not a short lease. It is a long funding lease, and the business, not the funder, would claim the plant allowances if it files on that basis.

Now change one input. If the same funder structured the deal as a five-year lease, the term is under seven years, so it is a short lease whatever the funding tests say, and the funder claims the allowances. The system, the site and the rate are the same; the term moved the relief from one party to the other, which is why the term in the agreement is worth reading before you compare rentals. The solar lease agreement checklist lists the other clauses to read alongside it.

What to do before you sign

1. Ask the funder which treatment it assumes. Ask whether it expects to claim the allowances or expects you to, and get the answer in writing.
2. Test the lease against both steps. Ask your accountant to apply the three funding tests and the seven-year line to the actual agreement, using the current wording of the Act.
3. Check the rentals reflect it. If the funder claims the allowances, its rentals should be lower than a no-allowance price. If you will claim them, compare the net cost after your own tax relief. The hire purchase, loan and lease calculator compares the structures, with its lease column assuming an ordinary lease.
4. Allow for the accounts. The revised FRS 102 puts most leases on the lessee’s balance sheet for periods beginning on or after 1 January 2026. That does not change who claims the allowances, but it does change how the lease looks to lenders. See the FRS 102 lease changes.
5. Check VAT separately. VAT on a lease is charged on each rental, which changes cash flow and not the net cost for a business that recovers its VAT. See VAT on commercial solar.

This page explains the published rules in outline and is not tax advice. This site is not a lender and not an installer. If you want to test a structure with a funder, send the system cost and term through the quote form and we reply by email.