CAPITAL ALLOWANCES EXPLAINED
Capital Allowances FAQs
Answers to some of the most common questions about Capital Allowances on commercial property, including historic claims, property purchases, refurbishments, Section 198 elections and how claims interact with your existing tax affairs.
Understanding Capital Allowances
What are Capital Allowances?
Capital Allowances are a form of tax relief available on certain types of capital expenditure. Rather than deducting the cost of qualifying assets as a normal business expense, Capital Allowances allow some or all of that expenditure to be deducted when calculating taxable profits.
In commercial property, qualifying expenditure can include plant and machinery, fixtures and integral features that form part of the building.
These can include electrical and lighting systems, heating and ventilation, air conditioning, hot and cold water systems, lifts, fire alarms, security systems, fitted kitchens and other qualifying installations.
For property owners, significant amounts of qualifying expenditure can therefore be contained within the building itself and may not be immediately obvious from the purchase price or accounting records.
Who can claim Capital Allowances on commercial property?
Capital Allowances may be available to businesses and individuals who incur qualifying expenditure on plant, machinery and fixtures used for a qualifying activity.
This can include companies, sole traders, partnerships and commercial property investors, subject to their individual circumstances and the way in which the property is owned and used.
Tenants can also potentially claim Capital Allowances on qualifying expenditure they incur on a property, for example through a commercial fit out or refurbishment.
The important principle is that entitlement normally follows the person who incurs the qualifying expenditure and satisfies the relevant Capital Allowances rules. Property ownership alone does not automatically create an entitlement to claim.
What types of expenditure can qualify?
A commercial property can contain many different types of qualifying plant, machinery and fixtures.
Common examples include:
- Electrical and lighting systems
- Heating and ventilation systems
- Air conditioning and cooling
- Hot and cold water systems
- Lifts and other qualifying mechanical installations
- Fire alarms and security systems
- Fitted kitchens and certain sanitary installations
- Specialist equipment and installations
- Certain costs associated with installing qualifying plant and machinery
The exact position depends on the nature of the asset, when the expenditure was incurred and the circumstances in which it was acquired.
The building itself, land and many structural elements do not generally qualify for Plant and Machinery Allowances, although expenditure on qualifying structures and buildings may potentially fall within separate Capital Allowances provisions.
What is the Annual Investment Allowance?
The Annual Investment Allowance (AIA) allows businesses to deduct the full value of most qualifying plant and machinery expenditure from taxable profits in the period in which the expenditure is incurred, subject to the available AIA limit.
The current AIA limit is £1 million.
This can provide substantially faster tax relief than claiming Writing Down Allowances over a number of years.
AIA is subject to eligibility rules and the available allowance can be affected by factors including connected businesses, accounting periods and the nature of the expenditure.
AIA is particularly relevant to expenditure incurred directly by a business, such as qualifying expenditure within a commercial property refurbishment or fit out.
What are Writing Down Allowances?
Where qualifying expenditure is not relieved in full through the Annual Investment Allowance, First Year Allowances or another available relief, tax relief may instead be obtained through Writing Down Allowances.
Qualifying expenditure is allocated to the appropriate Capital Allowances pool and a percentage of the remaining balance is claimed each year.
From April 2026, the main pool Writing Down Allowance rate is 14%. The special rate pool remains at 6%.
Many integral features within commercial properties, including electrical systems, lighting, heating, air conditioning and hot and cold water systems, fall within the special rate pool.
Writing Down Allowances therefore provide tax relief over time rather than necessarily giving the full deduction in the year the expenditure is incurred.
Existing Properties & Historic Claims
I bought my property years ago. Can I still claim Capital Allowances?
Potentially, yes. There is no general rule that prevents a Capital Allowances claim simply because a commercial property was purchased several years ago.
Whether allowances remain available will depend on factors including when the property was acquired, whether previous owners were entitled to claim Capital Allowances and how qualifying fixtures were dealt with when ownership changed.
For more recent second hand property transactions, the pooling and fixed value requirements can be particularly important.
If you have owned a commercial property for several years and have never had a specialist Capital Allowances review undertaken, it can still be worth investigating the position.
Is there a two year deadline for claiming Capital Allowances?
There is no general two year deadline for making a Capital Allowances claim on a commercial property.
The confusion often arises because there is normally a two year time limit for satisfying the fixed value requirement following certain transfers of fixtures, commonly through a Section 198 election between the buyer and seller.
This is different from saying that all Capital Allowances must be claimed within two years of purchasing a property.
The ability to claim will depend on the circumstances of the property, when it was acquired and whether the relevant legislative requirements have been satisfied.
What if a previous owner has already claimed Capital Allowances?
A previous owner’s claim does not necessarily mean that no Capital Allowances are available to you.
Where a previous owner was entitled to Capital Allowances on fixtures, the amount available to a subsequent owner can be affected by the previous owner’s qualifying expenditure and the disposal value attributed to those fixtures.
For relevant property transactions, the pooling and fixed value requirements must also be considered. A Section 198 election may have been used to establish the value of qualifying fixtures transferring between the parties.
It is therefore important to establish what was previously claimed and how the fixtures were treated rather than assuming that either all or none of the Capital Allowances remain available.
What if I don’t know whether the previous owner claimed?
This is common, particularly where a property has changed ownership several times or the Capital Allowances position was not investigated during the purchase.
The starting point is usually to review the documentation available from the acquisition, including the sale contract, Commercial Property Standard Enquiries (CPSEs), any Section 198 election and information provided by the seller.
Further investigation may be required to establish whether a previous owner was entitled to claim, whether qualifying expenditure was pooled and what value was attributed to the fixtures when the property changed hands.
A lack of information does not automatically mean that a claim is impossible, but the property’s ownership and Capital Allowances history may need to be established before entitlement can be determined.
Can I claim Capital Allowances if I have tax losses?
Potentially, yes. Being in a tax loss position does not in itself prevent qualifying expenditure from being included within a Capital Allowances claim.
However, the timing and type of allowance claimed can affect the tax position. For example, the Annual Investment Allowance is available only for the chargeable period in which the qualifying expenditure is incurred, although claiming it can increase a tax loss that may potentially be relieved in accordance with the relevant loss relief rules.
In other circumstances, qualifying expenditure may instead remain within a Capital Allowances pool and Writing Down Allowances can be considered in later periods.
The most appropriate treatment will depend on the taxpayer’s individual circumstances, so the timing of the tax relief should be considered with your accountant or tax adviser.
Buying Commercial Property
Can I claim Capital Allowances when buying a second hand commercial property?
Potentially, yes. When a commercial property is purchased, part of the purchase price may relate to qualifying fixtures and building services contained within the property.
However, the amount available to the purchaser can depend on the Capital Allowances history of those fixtures, including whether a previous owner was entitled to claim and whether the relevant pooling and fixed value requirements have been satisfied.
For this reason, Capital Allowances should ideally be considered as part of the acquisition process rather than investigated only after completion.
What is a Section 198 election?
A Section 198 election is a joint election between the buyer and seller of a commercial property that fixes the value attributed to qualifying fixtures for Capital Allowances purposes.
The amount agreed normally determines both the seller’s disposal value and the purchaser’s qualifying expenditure for the fixtures covered by the election.
A Section 198 election is permanent once validly made, so the purchaser should understand the Capital Allowances position before agreeing the value.
Do I have to accept a £1 Section 198 election?
No. £1 is sometimes proposed as a nominal value for a Section 198 election, but there is no general requirement for a purchaser to accept a £1 election.
The amount attributed to the qualifying fixtures can directly affect the Capital Allowances available to the purchaser. Before agreeing a nominal value, it is therefore important to understand what the seller has previously claimed, what expenditure has been pooled and what allowances could potentially pass to the buyer.
Where the Capital Allowances position has not been established, agreeing a £1 election without further investigation could unnecessarily restrict the purchaser’s future claim.
What is the pooling requirement?
For relevant commercial property transactions, the pooling requirement means that a previous owner who was entitled to claim Capital Allowances on qualifying fixtures must normally have brought the relevant expenditure into their Capital Allowances pool before the property is transferred.
The requirement generally applies to transfers taking place from April 2014.
Where the pooling requirement applies but has not been satisfied, the purchaser may be unable to claim Capital Allowances on the affected fixtures.
This makes establishing the seller’s previous Capital Allowances position particularly important when buying a second hand commercial property.
What is the fixed value requirement?
The fixed value requirement is used to establish the amount attributed to qualifying fixtures when ownership changes.
In most property transactions where the requirement applies, it is satisfied by the buyer and seller entering into a Section 198 election agreeing the value of the fixtures. If agreement cannot be reached, an application can potentially be made to the First tier Tribunal to determine the value.
The requirement normally needs to be satisfied within two years of the property transfer.
If the fixed value requirement applies and is not satisfied within the relevant period, the purchaser’s qualifying expenditure on the affected fixtures can be treated as nil, preventing Capital Allowances from being claimed on them.
Do Capital Allowances need to be considered before completion?
There is not a general requirement for every Capital Allowances matter to be completed before the property purchase itself completes. However, considering the position before completion can be extremely important.
Before completion, the purchaser and their advisers have an opportunity to establish what the seller has previously claimed, whether qualifying expenditure has been pooled, whether a Section 198 election is required and what value should be attributed to the fixtures.
It also provides an opportunity to raise appropriate enquiries and ensure that the treatment of Capital Allowances is reflected within the transaction documentation.
Although some matters can be dealt with after completion, leaving the investigation until later can reduce the purchaser’s ability to obtain information or negotiate with the seller.
Refurbishments & Property Expenditure
Can Capital Allowances be claimed on property refurbishments?
Yes. Refurbishment, extension and fit out projects can contain significant amounts of expenditure that qualify for Capital Allowances.
Qualifying expenditure may include electrical and lighting systems, heating and ventilation, air conditioning, hot and cold water systems, lifts, fire and security systems, fitted kitchens and other plant, machinery and fixtures installed as part of the works.
Certain associated costs may also qualify, including some professional fees and alterations to an existing building that are directly related to the installation of qualifying plant and machinery.
Not all refurbishment expenditure qualifies for Plant and Machinery Allowances, so the project costs need to be analysed to distinguish qualifying assets from expenditure on the building, structure and other non qualifying works.
Can I claim for a refurbishment completed several years ago?
Potentially, yes.
The fact that refurbishment works were completed several years ago does not necessarily mean the opportunity has been lost.
The position will depend on when the expenditure was incurred, what Capital Allowances have already been claimed and the tax circumstances of the business or property owner.
Where qualifying expenditure has not previously been identified, it may still be possible to bring that expenditure into the appropriate Capital Allowances pool and claim available Writing Down Allowances.
Historic refurbishment projects can therefore be worth reviewing, particularly where the original expenditure was treated simply as capital expenditure without a detailed Capital Allowances analysis.
What if my refurbishment costs weren’t separated into qualifying and non qualifying expenditure?
This is common. Building contractors and project accounts are generally prepared to describe and cost the construction work rather than determine its treatment for Capital Allowances purposes.
A refurbishment invoice or cost plan may therefore contain both qualifying and non qualifying expenditure within the same cost heading.
A specialist Capital Allowances review analyses the underlying project expenditure to identify the plant, machinery, fixtures and associated costs that qualify.
Where costs relate partly to qualifying and partly to non qualifying expenditure, an appropriate apportionment may be required based on the available evidence and circumstances of the project.
What if I don’t have detailed invoices for all the expenditure?
The absence of a complete set of detailed invoices does not necessarily mean that a Capital Allowances review cannot be undertaken, but sufficient evidence must exist to support the expenditure included within a claim.
Other available records may help establish the nature and cost of the works, including contractor valuations, project cost schedules, specifications, drawings, contracts, completion accounts and other contemporaneous documentation.
Where expenditure cannot be directly identified, appropriate valuation or apportionment techniques may sometimes be required. Any methodology used should be supportable and based on the available evidence rather than simply estimating a claim without justification.
Good supporting records are important because the taxpayer must ultimately be able to substantiate the expenditure on which the Capital Allowances claim is based.
Accountants, Tax & Making a Claim
Doesn’t my accountant already claim Capital Allowances?
Your accountant may already be claiming Capital Allowances on assets that are clearly identified within your accounting records, such as equipment, furniture, computers or machinery.
Commercial property can be more complex. Qualifying fixtures and building services may be embedded within the purchase price of a property or contained within wider construction and refurbishment costs, without being separately identified in the accounts.
A specialist Capital Allowances review complements the work of your accountant by identifying and valuing qualifying property expenditure. Once the review is complete, the resulting Capital Allowances report can be provided to your accountant for incorporation into your tax computations and return.
Does the fixed asset register determine what can be claimed?
No. The accounting treatment of an asset does not determine whether expenditure qualifies for Capital Allowances.
A fixed asset register is an important accounting record, but qualifying expenditure within a commercial property may not appear as separately identifiable assets. Building services and fixtures can instead be included within broader headings such as freehold property, leasehold improvements or refurbishment costs.
Capital Allowances are determined by the relevant tax legislation and the nature of the expenditure, rather than simply by how an item has been described in the accounts.
A specialist review can therefore identify qualifying expenditure that may not be apparent from the fixed asset register alone.
Will claiming Capital Allowances increase Capital Gains Tax when I sell?
Generally, claiming Plant and Machinery Allowances on fixtures does not simply increase the capital gain on the property by the amount of Capital Allowances claimed.
Capital Allowances and the taxation of the property disposal operate under different rules. When qualifying fixtures are disposed of, the Capital Allowances legislation may require a disposal value to be brought into the relevant Capital Allowances computation.
For commercial property transactions involving fixtures, the seller and purchaser may also need to consider the value attributed to those fixtures and whether a Section 198 election is required.
The precise tax consequences of a future disposal will depend on the circumstances, so your accountant or tax adviser should consider the overall tax position when the property is sold.
Are Capital Allowances just a timing difference?
Not necessarily.
Accounting depreciation is generally not deductible when calculating taxable profits. Capital Allowances provide the statutory mechanism through which tax relief may instead be obtained on qualifying capital expenditure.
The timing of the relief can vary. Some expenditure may qualify for immediate relief, while other expenditure is relieved over time through Writing Down Allowances.
For a business that would otherwise pay tax, identifying qualifying expenditure can therefore reduce taxable profits and improve cash flow. The actual value and timing of the benefit will depend on the allowances available and the taxpayer’s individual circumstances.
How is a Capital Allowances claim valued?
The approach depends on how the qualifying expenditure arose and what information is available.
For refurbishment, fit out and construction projects, actual project costs can be analysed to identify expenditure relating to qualifying plant, machinery and fixtures.
When an existing commercial property is purchased for a single price, the qualifying expenditure may need to be established using the appropriate statutory valuation or apportionment methodology, taking account of the property, the qualifying fixtures and the available transaction information.
A specialist review may therefore involve analysis of expenditure records, property documentation and a survey of the property to identify and value the qualifying assets.
The methodology and supporting evidence should be documented so that the resulting claim can be substantiated.
How is the claim actually made?
Capital Allowances are claimed through the taxpayer’s relevant tax return and computations.
Blue Dawn Commercial identifies the qualifying expenditure and prepares the supporting Capital Allowances analysis and report. This can then be provided to your accountant or tax adviser, who can incorporate the appropriate allowances into your tax computations and return.
The way in which the allowances are claimed will depend on factors including the type of taxpayer, when the expenditure was incurred and which Capital Allowances are available.
The resulting allowances reduce taxable profits, potentially reducing the amount of tax payable or affecting the taxpayer’s loss position.