Very few aircraft are purchased outright with cash. The majority of UK aircraft acquisitions involve some form of financing, whether a secured loan, operating lease, or structured finance arrangement. Understanding the options available is essential to selecting the most appropriate and tax-efficient structure for your circumstances.
Secured Aircraft Loans
The most common form of aircraft finance in the UK is a secured loan, where the aircraft itself serves as collateral. Specialist aviation lenders offer loan-to-value ratios typically between 70% and 85%, with terms of 7 to 15 years and interest rates that reflect the borrower credit profile and the aircraft type and age.
Key features of secured aircraft loans:
- The borrower takes ownership of the aircraft from completion
- Interest payments may be tax-deductible for business use
- Capital allowances may be available on the aircraft value
- The lender registers an international interest under the Cape Town Convention
- Early repayment is usually permitted, sometimes with a penalty
Major aviation finance providers active in the UK market include Global Jet Capital, Textron Financial, Pillsbury, and several private banks with specialist aviation desks.
Operating Leases
An operating lease allows the use of an aircraft without taking ownership. The lessor retains ownership and the associated risks of residual value, while the lessee pays a monthly lease rate for an agreed term, typically three to seven years.
Operating leases are particularly attractive for businesses because lease payments are typically fully deductible as an operating expense, the aircraft does not appear on the lessee balance sheet, and there is no exposure to residual value risk at the end of the term.
However, operating leases for business aircraft are less common than for commercial airliners, and the terms available depend heavily on the aircraft type and its marketability at lease end.
Finance Leases and Hire Purchase
A finance lease is similar to an operating lease but with the expectation that the lessee will acquire the aircraft at the end of the term, usually for a nominal sum. Hire purchase arrangements work similarly, with ownership transferring to the buyer upon completion of all payments.
These structures offer a middle ground between outright purchase and operating lease, providing some of the tax benefits of leasing while building equity in the aircraft over the term.
VAT and Tax Considerations
The financing structure has significant implications for VAT and corporation tax:
- Outright purchase: VAT is payable on completion (20% in the UK). Input VAT may be recoverable if the aircraft is used for taxable supplies.
- Finance lease: VAT is typically charged on each lease payment rather than the full value upfront, which improves cash flow.
- Operating lease: VAT is charged on lease payments. The full payment is an allowable business expense for corporation tax.
- Hire purchase: VAT is payable on the cash price at the outset, but capital allowances may be claimed on the aircraft value.
The interaction between financing structure, VAT, and corporation tax is complex. Specialist aviation tax advice is essential to ensure the chosen structure delivers genuine benefit and complies with HMRC requirements.
Structuring for International Operations
Aircraft that operate internationally are frequently owned through structures involving offshore entities, typically in the Isle of Man, Guernsey, or Cayman Islands. These structures can offer regulatory efficiency, privacy, and in some cases, tax advantages.
It is critical that any such structure has genuine commercial substance and is not solely motivated by tax avoidance. HMRC scrutiny of aircraft ownership structures has increased in recent years, and arrangements must be defensible.
Choosing the Right Finance Structure
The optimal structure depends on several factors:
- How long you intend to hold the aircraft
- Whether you want ownership or prefer the flexibility of leasing
- Your tax position and the availability of capital allowances
- The aircraft type and its expected residual value
- Whether the aircraft will be used commercially (charter) or privately
Aviator Aircraft Sales works with specialist aviation finance providers and tax advisors to help our clients structure acquisitions efficiently. For advice on financing an aircraft purchase in the UK, contact our team.