12.1 Introduction

An alternative to financing the purchase of a ship by a loan secured by a mortgage is through lease financing. This will generally be used for tax reasons whereby the lender can obtain the benefit of capital allowances on the vessel and is thereby able to reduce the cost of the loan.2 Under UK taxation rules this was possible for finance leases entered into prior to 1 April 2006 unless there was an option for the borrower to purchase the vessel before the end of the loan.3 The new rules which apply to leases entered into on or after 1 April 2006 allocate capital allowances under long funding leases to the lessee, not the lessor, so that long funding lessors are taxed in a similar way to which the way in which they would have been taxed had they made a loan, and long funding lessees in a way that is similar to the way in which they would be taxed had they purchased the asset.4 Under a finance lease, legal title to the vessel being bought will be transferred to the lender who will then execute a bareboat charter to the borrower for the term of the loan.5 This will transfer possession of the vessel for the term of the charter to the borrower, who will crew the vessel. The lender’s primary security will be its ownership of the vessel, although this will be supplemented by guarantees from various parties associated with the borrower.