The Capital Allowances Due Diligence Checklist for Commercial Property Transactions

Contents

• • Introduction

• • What are capital allowances and why do they matter?

• • Why capital allowances due diligence matters

• • The Capital Allowances Checklist
    • 1. Review ownership and claim history
    • 2. Identify qualifying expenditure
    • 3. Check pooling requirements
    • 4. Review Section 198 elections
    • 5. Assess unclaimed allowances
    • 6. Analyse transaction documents
    • 7. Consider VAT interaction
    • 8. Engage specialist advice early
    • 9. Align capital allowances with your commercial strategy
    • 10. Maintain clear documentation

• • How to claim capital allowances correctly

• • FAQs

Introduction

Capital allowances are one of the most valuable yet underutilised tax reliefs available in commercial property transactions. Despite their significance, many property owners, accountants and solicitors alike fail to address them properly during due diligence. This results in missed capital allowances, reduced tax efficiency and, in the worst case scenarios, missed opportunities for tax relief.

We regularly encounter transactions where allowances have been overlooked entirely or considered too late in the process. The reality is, if capital allowances aren’t addressed at the right time, you risk losing the opportunity to claim them. Thankfully, our experts are here to help.

This guide provides a comprehensive and practical capital allowances checklist, helping you understand how to claim capital allowances correctly, remain compliant with HMRC capital allowances requirements, and maximise value throughout your commercial property dealings.

What are capital allowances and why do they matter?

Capital allowances provide tax relief on qualifying expenditure incurred on plant and machinery within commercial property. In simple terms, they’re a form of tax relief that covers embedded assets such as heating and air conditioning systems, electrical installations, lifts, fire alarms, security systems, and sanitary fittings. This list is not exhaustive.

For businesses, capital allowances reduce taxable trading profits, which in turn lowers corporation tax liabilities. In the context of commercial property transactions, they can have a significant impact on financial outcomes and your overall return on investment. Capital allowances can also improve your business cash flow and therefore allow you to reinvest your money in other investment properties, for example.

The hidden value in commercial property

Many commercial properties contain significant levels of qualifying plant and machinery that aren’t immediately visible – especially if they haven’t been properly documented. In our experience, it’s not uncommon for 5-20% of a property’s purchase price to relate to assets that could qualify for capital allowances. However, without a detailed review, this value often goes unrecognised.

When properly identified and quantified, they effectively act as a financial asset embedded within the property itself. This makes early and thorough due diligence essential for both buyers and sellers.

Why capital allowances due diligence matters

Capital allowances due diligence is a fundamental part of any well-managed property transaction. It ensures that tax relief is preserved, correctly allocated, and compliant with current legislation.

Failure to carry out proper due diligence can result in missed capital allowances, particularly where historic expenditure has not been identified or pooled correctly. It can also lead to inadvertent non-compliance with HMRC, which imposes strict requirements on how allowances are transferred between parties.

Making sure you’re informed is the best way to avoid costly mistakes – any uncertainty around capital allowances can reduce transaction value. Buyers may adjust their offers if allowances are unavailable or unclear, while sellers may inadvertently give away valuable tax relief. In more complex cases, unresolved capital allowances issues can delay completion or introduce unnecessary legal and commercial risk.

The Capital Allowances Checklist

A structured approach is essential to ensure capital allowances are fully considered in commercial property transactions. Our checklist outlines the key steps for you.

1. Review ownership and claim history

Key considerations:

• • Has the current owner previously claimed capital allowances?

• • Were those claims maximised or only partially utilised?

• • Are there historic claims from previous owners?

Why this matters

Capital allowances are heavily influenced by historical ownership and prior claims. If earlier owners failed to take the correct steps, future claims may be restricted or entirely unavailable. A detailed review of documentation such as purchase contracts, Heads of Terms, CPSE responses and lease contracts (if applicable) is essential at an early stage.

2. Identify qualifying expenditure

What to look for:

• • Embedded plant and machinery

• • Fixtures and integral features within the building

• • Costs associated with refurbishments or fit-outs

Common challenges

Qualifying expenditure is often underestimated. Many assets that appear to be part of the building fabric may actually qualify for allowances. Without a specialist review, these items are frequently missed. A professional capital allowances survey is typically required to accurately identify and value qualifying assets.

3. Check pooling requirements

What is pooling?

Pooling is the process of bringing qualifying expenditure into a seller’s tax computation before disposal.

Why is pooling critical?

Under HMRC capital allowances rules, sellers must pool expenditure in order for allowances to be transferred to a buyer. If this step is not completed before the transaction, the buyer may be unable to claim. This is one of the most common causes of missed capital allowances in commercial property transactions.

4. Review Section 198 elections

What is a Section 198 election?

A Section 198 election is a formal agreement between buyer and seller that fixes the value of plant and machinery for capital allowances purposes.

Key points:

• • It determines how allowances are apportioned between parties

• • It must be agreed within a specific timeframe

• • It should be addressed during negotiations, not after completion

Failure to properly agree to an election can lead to disputes or restricted claims.

5. Assess unclaimed allowances

Identifying opportunities

Many properties have missed capital allowances from previous acquisitions or capital expenditure that has never been reviewed. Unclaimed allowances can often be identified retrospectively, unlocking significant tax savings. However, this depends on compliance with historical rules and the availability of supporting information. A specialist review is essential to uncover these opportunities.

6. Analyse transaction documents

What to review:

• • Sale and purchase agreements

• • Heads of terms

• • CPSE responses

Common issues

Capital allowances are often omitted or poorly defined in legal documentation. This can create ambiguity around entitlement and increase the risk of disputes. Clear and explicit drafting is essential to ensure both parties understand how allowances will be treated.

7. Consider VAT interaction

While separate from capital allowances, VAT can influence how transactions are structured.

Key considerations:

• • Whether the property is opted to tax

• • Whether the transaction qualifies as a transfer of a going concern

These factors can affect the overall tax position and should be considered alongside capital allowances during due diligence.

8. Engage specialist advice early

Capital allowances is a highly technical area that combines tax legislation, property analysis, and valuation expertise.

Engaging a specialist at an early stage ensures that:

• • All qualifying expenditure is identified

• • Claims are maximised

• • Compliance with HMRC capital allowances requirements is maintained

Early involvement also allows capital allowances to be factored into negotiations at their inception, rather than addressed retrospectively.

9. Align capital allowances with your commercial strategy

Capital allowances should not be viewed purely as a technical tax exercise. They play a strategic role in shaping the outcome of a transaction. For sellers, the decision to claim allowances before disposal or pass them to the buyer can influence both tax efficiency and marketability. For buyers, securing access to allowances can improve cash flow and enhance investment returns.

When properly integrated into the wider commercial strategy, capital allowances can strengthen negotiating positions and lead to better-informed decision-making. This all counts towards facilitating smoother transactions and improved financial outcomes.

10. Maintain clear documentation

Accurate and comprehensive documentation is essential throughout the process. Don’t neglect on your written records.

Key documents:

• • Capital allowances reports

• • Supporting valuations

• • Elections and contractual agreements

Well-maintained records ensure compliance, support future claims, and reduce the risk of challenges.

How to claim capital allowances correctly

Understanding how to claim capital allowances correctly is fundamental to securing relief and avoiding any disputes further down the line.

Simply put:

• • you work out which parts of the property qualify for tax relief and how much they cost

• • you include those costs in your tax calculations and agree the figures with the other party if needed

• • you claim the tax relief through your tax return, making sure you have written proof to support your claim

Common mistakes include presenting incomplete information, failing to consider historical ownership, missing critical deadlines, and attempting to prepare claims without specialist input. These errors can lead to reduced claims or complete loss of entitlement.

The strategic importance of capital allowances in commercial property transactions

Capital allowances play a significant role in shaping the financial performance of commercial property investments.

Rather than being treated as a secondary consideration, capital allowances should form part of the core transaction strategy – treat them as an opportunity to optimise financial outcomes and make more informed investment decisions. When addressed early and managed correctly, they can materially improve the success of a commercial property transaction. For more advice or specialist valuations, reach out to our team today.

FAQs

What are missed capital allowances?

Missed capital allowances are qualifying expenditures that have not been identified or claimed. In many cases, these can still be recovered, but failure to act promptly increases the risk of losing entitlement.

Can capital allowances be claimed after purchasing a property?

Yes, but only if the correct steps have been taken during the transaction. If pooling requirements and elections were not properly addressed, the ability to claim may be lost.

How do HMRC capital allowances rules affect commercial property transactions?

HMRC guidelines impose strict requirements on how allowances are claimed and transferred, including pooling obligations, fixed value requirements, and formal elections. Non-compliance can invalidate claims entirely.

Who should carry out a capital allowances review?

A specialist capital allowances valuing firm should undertake the review to ensure accurate identification, valuation, and compliance.

Are capital allowances relevant for both buyers and sellers?

Yes. Sellers must consider how allowances are treated prior to disposal, while buyers need to ensure they can access and claim available relief.

How much are capital allowances typically worth?

The value varies depending on the property, but it is possible for 5-20% of the purchase price to qualify.

When should capital allowances be considered?

Capital allowances should be addressed at the earliest stage of due diligence to avoid missed capital allowances and compliance risks.