Capital Allowances on Commercial Property | Lovell Consulting

What are Capital Allowances?

Capital allowances (CAs) are a form of UK tax relief for businesses that incur qualifying capital expenditure on their commercial properties for use as part of their trade. Qualifying capital expenditure includes but is not limited to plant, machinery and business vehicles, in which the costs of assets may be eligible to offset against taxable trading profits. See below for what qualifies for CAs on commercial properties.

How They Differ from Depreciation / Why They Exist

Depreciation on capital assets is not an allowable deduction for UK tax purposes and must be added back when calculating taxable trading profits. CAs were therefore introduced to provide tax relief in the form of a deduction at their specific rates to incentivise businesses to invest more.

The table below illustrates the rate at which CAs may be claimed at, scenario where they may be available and what type of business can claim.

Importance for UK Commercial Property Investors and Buyers

CAs are available for not only construction projects, but also for acquisition of commercial properties. The quantum of CAs available differ from property to property and expert analysis on the tax history and use of the property is required to establish the entitlement to claim. A copy of the purchase contract and CPSE responses (see below) is required to accurately determine the CA position.

In most cases, Buyers should consider the availability of CAs as early as possible, ideally at the Heads of Terms stage, where the parties agree whether allowances are to be kept by the seller or to pass on to the buyer. Generally speaking, the party which raises the CA point first benefits from the allowances post transactions, but this is not always the case.

Capital Allowances on Property Purchase & Sale

How Capital Allowances Apply in Commercial Sale/Purchase Contracts

As part of an acquisition of a building, usually, there are existing fixtures and plant that are acquired as part of the purchase price. Provided there is entitlement to claim allowances on these fixtures, HMRC does allow UK taxpayers to attribute a proportion of the total purchase price (including SDLT and associated fees) to qualifying expenditure for fixtures and plant. This scenario occurs if the seller or previous sellers could not have claimed on the existing assets (i.e. they are non-taxpaying, could not have claimed integral features due to the ownership period being before April 2008, or were the developer and held the property as trading stock).

Usually, the party that considers CAs first is the party that benefits most from the tax relief. CA specialists can suggest CA wording during the heads of terms stage which outlines who benefits from potential allowances and thus safeguards the claimant party from disputes during the contract stage, as both parties will have agreed on the CA position beforehand. Wording in the heads of terms does not need to be complicated – a single line stating which party will claim the available allowances will suffice, and Lovell Consulting can assist with this on both sides of the transaction.

Major changes to the CA regime were first introduced in the Finance Act 2012, which requires taxpaying sellers to meet both the pooling and fixed value requirements for any available CAs.

Pooling requirement – for commercial property transactions dated on or after 1 April 2014 (6 April 2014 for individuals), the seller must recognise expenditure qualifying for CAs by “pooling” the expenditure in a CA tax pool before the property is sold. If the pooling requirement is not met, then future buyers will be denied the ability to claim CAs on the existing fixtures and plant.

Fixed value requirement – this is a figure agreed by both parties and “fixed” in the s198/s199 tax election which states how much expenditure qualifying for CAs may be transferred over to the buyer. The amount may either be for £2 (where the seller retains all allowances and only transfers £2 to the buyer) or an amount not exceeding the CAs available (i.e. the seller’s original cost on the fixtures and plant). The time limit for this requirement to be met is two years after the completion date. The fixed value requirement is mandatory from 1 April 2012 (or 6 April 2012 for individuals) onwards.

CAA 2001 Section 198 Tax Election and Section 270IA SBA Statement Explained

Buyers should find a solicitor who can provide clear CA wording including a CAA2001 S198 tax election and S270IA SBA statement where relevant. The S198 tax election is a form between parties that agrees the amount of available CAs (main and special rate pool) to transfer to the buyer (if any). This must be agreed and signed within 2-years post completion – if this deadline is missed then the Seller will suffer a clawback on CAs claimed and any subsequent Buyers will be denied from claiming CAs on their acquisition.

Similarly, the S270IA SBA statement determines the amount of structures and buildings allowances to pass on to the buyer. In some cases where the seller couldn’t have made a claim for CAs (i.e. non tax-paying, owned pre-April 2008), the Buyer may benefit from unclaimed allowances without co-operation from the Seller. In these cases, HMRC allows for Buyers to claim CAs on a just and reasonable apportionment of purchase price (including SDLT and associated fees).

Role of the Commercial Property Standards Enquiries (CPSE)

CPSE responses are a list of replies by the Seller relating to the property. Questions on CAs are also part of the list (usually in section 32), which the seller confirms the accounting treatment of the property (investment or stock); if they have claimed and are willing to pool and transfer available allowances to the Buyer; if any previous owners have made a claim and; whether any tenants have carried out fit out works and claim allowances. In an ideal scenario, the Seller should answer the questions which makes it clear to the Buyer whether they will benefit from the allowances or not. This is not always the case, however, where some responses may just be answered with “N/A” for all questions, which is ambiguous and further research is required.

Additionally, answers may not be correct or accurate – many buyers rely on this information and potentially are missing out on the benefit of allowances. This results in requiring expert advice in order to establish entitlement. Therefore, whilst CPSE responses are a useful starting point for advisors when considering entitlement, they may not always be conclusive. Buyers are encouraged to appoint a CA expert like Lovell Consulting during the contract stage to ask the right questions and confirm the CA position.

What Qualifies for Capital Allowances on Commercial Property

Tax relief via CAs may be available for the following assets.

Structures and buildings allowances may also be available for assets such as walls, ceilings and hard landscaping – these are otherwise non-qualifying for CAs.

The list above is not exhaustive.

Capital Allowances and Commercial Due Diligence – Key Points for Buyers to Consider

• • Has the Seller even claimed CAs? If so, did they claim allowances via tax elections, pooling, historic claims or SBAs?

• • If they did not claim, is this because they held as trading stock or they are willing to pool and transfer allowances?

• • CPSEs should flag prior claims, elections and SBAs, if incomplete or insufficiently answered, targeted supplementary enquiries are needed.

• • Contract wording should clearly state which party benefits from CAs, s198 tax elections should be accurate in terms of the amount to pass on and what assets exist.

• • If Seller has not fully pooled qualifying fixtures, the contract should have wording requiring the Seller to pool and agree on a joint election. If this requirement is not met the Buyer will lose entitlement.

• • If Buyers cannot secure the tax relief (i.e. Seller keeping allowances), they may be able to re-negotiate purchase price to reflect the lost relief.
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Capital Allowances for Buyers vs Sellers

Residential Exceptions & Mixed-Use Properties

CAs are denied where a property or part of a property is used for residential purposes. There are exceptions to consider, however, such as qualifying assets located within shared communal spaces (in HMOs and flats), which may qualify for CAs. Assets located within dwellings (like bedrooms, bathrooms etc.) are non-qualifying. Structures and buildings allowances are also denied, but may still be eligible in mixed-use properties where part of the building is used for commercial purposes (retail, offices etc.).

Post 5 April 2025, properties used as furnished holiday lets are also considered “dwellings” for CA purposes, and therefore are non-qualifying. However, where CAs have been claimed prior to this date, any remaining allowances will be written down against future trading profits until fully utilised.