top of page

Dealing in Capital Allowances

If you are buying or selling a commercial property the capital allowances position will usually come up during pre-contract enquiries so it makes sense to plan ahead and know what to look out for to avoid an unsuspecting clawback or punitive restriction to nil.

The capital allowances rules for real estate are designed to link taxpayers claims between past and future owners so the UK government is protected from paying out allowances more than once on the same asset. This means if you sell or transfer a commercial property you should expect to be questioned on what you have claimed; and if you want to make a capital allowances claim for any purchases (including from developers and non-tax payers) you should make sure the right questions are being asked and the responses received adequate.

Almost all commercial real estate assets will contain expenditure that has at some point been eligible for capital allowances and here we briefly examine: -

​HMRC wants to see eligible businesses claim their full entitlement to allowances as expenditure is incurred and the rules are increasingly designed to encourage this behaviour.

Structures and Buildings Allowances Statements

Most commercial property that has been constructed (or altered) under a contract entered into, on or after, 29 October 2018 should contain a portion of Structure and Building Allowances (SBA). SBAs are an annual allowance based on the construction cost of the relevant building or structural part. Because the annual allowance is linked to when each contract works are completed and first used, an asset that is developed in phases can have multiple SBA claims attached to it.

To qualify for SBA, the building or structure must be brought into non-residential use which excludes dwellings and a lot of related accommodation. A building is treated as being in residential use if it is ancillary to a residential building, or situated on land intended to be occupied or enjoyed with a building in residential use. For example, swimming pools located in the grounds of a dwelling and facilities, gyms, cinemas and car parks provided as facilities for dwelling houses such as a block of flats would be ancillary and therefore excluded from SBA.

Usually it is up to the taxpayer to choose which allowance to claim where the expenditure may qualify for more than one capital allowance. However, SBA includes a priority rule that excludes capital expenditure on the provision of plant or machinery from being qualifying expenditure for SBA, whether plant and machinery allowances have been claimed or not. It also excludes land reclamation, land remediation, landscaping and statutory fees which means claimants should only make SBA claims after a thorough analysis of all expenditure is completed.

Businesses must have a 'relevant interest' in the asset (freehold or lease etc.) and be able to satisfy the non-residential use in each period of claim (subject to temporary disuse concessions). On sale of their 'relevant interest' there is no disposal event (although qualifying SBA claimed must be excluded in any Capital Gains Tax 'CGT' calculation) and the Buyer should be eligible to pick up the balance of any SBA claim (provided the qualifying conditions continue to be met) and they have an 'Allowances Statement'.

​If a business sells, transfers or grants a major interest (e.g. 35 year lease) in an asset that is subject to an SBA claim it will lose its entitlement to claim and what information (Allowances Statement) it provides to the new owners will determine what they can claim. The balance of SBA claims made for expenditure on assets that are demolished or 'relevant interests' that expire (e.g. short lease) are usually lost.


Example 1

A company with a chargeable period ended 31 December completes the construction of a new £5 million storage warehouse on 31 January 2020 and brings it into commercial use on the same day. Due to an increase in demand it begins works on a £1 million extension to increase operational capacity later the same year with completion and use on 1 April 2021.

Tax Treatment

Contract 1

Contract 2

Structures and Buildings



Plant and Machinery






Total Project Cost



Allowances Statement

Contract 1

Contract 2

Building information and location

Unit 1, Test Building, Test City

Unit 1a, Test Building, Test City

Earliest construction contract

1 January 2019

​30 April 2020

Qualifying SBA expenditure



Date the building came into use

31 January 2020

1 April 2021

The annual SBA increased from 2% (over 50 years) to 3% (over 33 1/3 years) from 1 April 2020 (6 April for income tax purposes) meaning the claim for 'Contract 1' straddles the rate change. This means the company will have to split its claim for Y/E 31 December 2020 (60/335 x £3,700,000 @ 2% + 275/335 x £3,700,000 @ 3% = £104,373). If it still owns the asset when the period of 33 1/3 years ends (23 May 2053) it may claim any shortfall arising from the Year 1 claim had the rate been 3% (an extra £6,267).

If the warehouse is sold the new owner can inherit the balance of any SBA claim but only if it keeps the building in non-residential use and obtains an 'Allowances Statement' from the Seller with the above core details. Doing so will entitle it to an annual allowance of up to £132,450 (£3,700,000 + £715,000 @ 3%) until expiry of the relevant 33 1/3 year term for each of the contracts involved. Projects in designated Freeport sites can attract 10% (over 10 years) instead of 3%.

No Allowances Statement = No Structures and Building Allowances


In the real world, Allowances Statements can be a lot more complex than the above. Construction projects can be phased, have retention payments well beyond first use and have parts demolished and/or remodelled over a number of years. There are also special rules for property subject to a long lease (35 years or more) and expenditure incurred by a lessee under an occupational lease.

Non-Tax Payers

​There can also be situations where the person incurring construction expenditure on a building is not within the charge to UK tax and therefore cannot make a claim for SBA. Examples include Government bodies, the Crown, Pension Funds and non-UK tax resident persons with no UK income.

In these circumstances, that person will still need to create an allowance statement, to include all the information outlined above, in order to provide the statement to any subsequent purchaser who is within the charge to UK tax and is entitled to claim SBA.

Where there is no allowance statement, the qualifying expenditure is nil which means co-operation is almost always needed from a Seller (including Developers) regardless of tax status, if a Buyer wishes to claim SBAs on a property that meets the conditions.

Example Buildings

​Call Centre, Car Park, Cinema, Commercial Office, Data Centre, Doctor's Surgery or Health Centre, Food Outlet, Garage or Workshop, Gym or Sports Hall, Hotel, Industrial Warehouse, Leisure Centre, Manufacturing Facility, Motor Dealership, Nursing or Residential Care Home, Pharmacy, Pub or Restaurant, Retail Shop, Retail Warehouse or Depot, Shopping Centre, Training Centre.

​Example Structures

​Roads, A constructed hard surface, such as a concrete or asphalt car park, Tunnels, Walls, Bridges, Aqueducts, Dams, Hard tennis courts, Fences, Permanent terracing and seating areas at sports grounds, artificially constructed parts of golf courses, such as bunkers, embankments.


Furnished Holiday Lettings, Student Accommodation, Serviced Apartments, Dwelling-House, Residential Accommodation for School Pupils, Residential Accommodation for Members of the Armed Forces, a Prison or similar establishment.

Plant and Machinery Fixtures (Elections)

​Fixtures elections were first introduced over 25 years ago (Finance Act 1997 Sch 16) to make it easier for the Seller and Buyer in a transaction that includes PMA fixtures to agree a value through commercial negotiation on sale.

If we assume from Example 1 above that the company was already trading and able to utilise its Annual Investment Allowance (£1 million from 1 January 2019) in each of the three accounting periods (2019, 2020 and 2021) it would have been able to claim the full cost of the Plant and Machinery (P&M) claim of £1,525,000 as it was incurred saving corporation tax of £289,750.

If the company sells the freehold on the open market it will be required to bring a disposal value (DV) into account reflective of the actual sale proceeds (contract allocations are not valid). This typically requires a 'just and reasonable apportionment' of the sale price to the constituent parts involved (land, buildings and plant) which will usually differ from the 'Allowances Statement' set out above. The lower the DV the more allowances and tax the Seller keeps.

When the asset is sold for a profit, the qualifying P&M expenditure can also be used to reduce a CGT gain (there is no restriction). However, if the asset is sold for a loss, the CGT loss should be restricted by reference to any P&M allowances claimed.

To circumvent the need for a capital allowances valuation the Seller and Buyer can elect (CAA 2001 s198) to fix the apportionable value at an agreed sum which cannot exceed the sale price or original P&M cost. The elected value sets the P&M claim for the Buyer and disposal value for the Seller. If the parties cannot agree, either can refer to First Tier Tribunal (FTT) to determine an apportionable sum. The election or referral must be done within two years from the date of sale.

If the Seller does nothing and decides to bring a nominal value into account they leave themselves exposed to an alternate value (with payment of underpaid tax plus interest) being imposed by HM Revenue & Customs (HMRC) through a routine compliance check. If the Buyer does nothing they will automatically be restricted to nil for any fixed P&M included in the sale.

HMRC accept that the value of a s198 election is for commercial negotiation between the parties involved, it can be as low as £1 or as high as original cost. The introduction of FTT referrals from April 2012 was designed to bring in some safe guarding to encourage fairer DV splits; in reality, FTT referrals are rare and there has been no notable change in s198 election approach or stance since this introduction.

If the Seller sells the property to a non-taxpayer (e.g. Pension Fund) it can still enter into a s198 election which should contain sufficient details to identify the items of P&M involved (including relevant 'main' and 'special rate' pool classifications) in the normal way.

If the property has been seized or repossessed by a court order the person selling the asset may not have the authority/right to make claims or sign any elections on sale. Knowing who you are dealing with and the current status of the past claimant is important; for example, a Law of Property Act (LPA) receiver may be appointed by a lender in respect of property on which the lender has a charge. The LPA receiver then sells the property on behalf of the owner.

Only the owner can enter into a CAA 2001 s198 election to fix the value of the fixtures and if they do not co-operate, the election cannot be made. Neither does an LPA receiver have any direct power to ensure that the seller pools any qualifying expenditure in a chargeable period beginning on or before the date of sale.

If the company decided it did not need the £1,525,000 of P&M allowances for commercial reasons such as taxable profits/trading losses and did not 'pool' the expenditure in any tax computations (including the period of sale) it will not be able to enter into a s198 election (no claim = no disposal event) which means the Buyer (and any future owner) will be restricted to nil.

Regardless of the claim position, if the Buyer discovered that the £60,000 of Non-Qualifying expenditure was actually eligible fixed Plant and Machinery and was missed by

the Seller, it will not be entitled to make a fresh claim. Only fixtures P&M expenditure 'pooled' by the Seller is capable of transfer to future owners.

The fixtures elections and mandatory pooling restrictions only apply to fixtures in a property sale where the Seller was entitled to claim. Buyers claims for non fixture assets will normally be based on the market value/price paid (just and reasonable apportionment if no supportable allocation).

Example Buildings

​​Call Centre, Car Park, Cinema, Commercial Office, Data Centre, Doctor's Surgery or Health Centre, Food Outlet, Garage or Workshop, Gym or Sports Hall, Hotel, Industrial Warehouse, Leisure Centre, Manufacturing Facility, Motor Dealership, Nursing or Residential Care Home, Pharmacy, Pub or Restaurant, Retail Shop, Retail Warehouse or Depot, Shopping Centre, Training Centre AND (Furnished Holiday Lettings, Student Accommodation, Serviced Apartments, Dwelling-House, Residential Accommodation for School Pupils, Residential Accommodation for Members of the Armed Forces, a Prison or similar establishment).

PMA Claim Examples for S198 Fixtures Elections

  • ​Air conditioning, heating and ventilation installations

  • Automatic entry systems

  • Automatic sliding doors

  • Automatic teller machines

  • Builders work in connection with services installations

  • Building management systems

  • Care lift installation

  • Cold water installation

  • Cold water pumps

  • Cold water storage tank

  • Communications & special installations

  • Cycle park installation

  • Dedicated drinking supply

  • Demountable flooring systems

  • Demountable partitioning systems

  • Document hoist and transport systems

  • Document storage systems

  • Electrical door operating systems

  • Electrical installation complete including switchgear, lighting and power supplies, etc

  • Escalators

  • Extract ventilation installation

  • Fire alarm installation

  • Fire fighting equipment

  • Flag poles

  • Garbage and waste disposal systems

  • Heat exchangers

  • Hot water installation

  • Illuminated signs

  • Lightning protection installation

  • Fitted furniture

  • Mechanical door closers

  • Mechanical window gear

  • Passenger and goods lifts installations

  • Petrol pumps and tanks

  • Pool filtration and water treatment equipment

  • Public address and intercom systems

  • Refrigeration equipment

  • Safes (installed)

  • Sanitary and welfare equipment

  • Security installation

  • Security lighting installation

  • Sewerage and trade effluent plant

  • Special light fittings

  • Standby generator installation

  • Storage racking and equipment

  • Strong rooms

  • Swimming pool installations

  • Telephone and data systems

  • Television and audio visual systems

  • Trade and information signs

  • Trade drainage installation

  • Trade related sound insulation

  • Vehicle control equipment

  • Vehicle loading platforms

  • Weighbridge and turntables

  • Window cleaning equipment

PMA Claim Examples Often Not Eligible for s198 Fixtures Election

  • ​Ambient features (paintings, bric-a-brac etc.)

  • Carpet and removable floor coverings

  • Catering equipment (moveable)

  • Computer equipment

  • Curtains and Blinds

  • Door matting and matwells

  • Loose furniture and equipment (tables, chairs, lamps etc.)

  • Removable fire crowd control equipment

  • Sculptures (moveable)

  • Satellite dishes and TV Aerials

  • Trade process plant and machinery (moveable)

Non-Tax Payers

​Had the Seller company been outside the charge to tax (and not entitled to 'pool' capital allowances) there will be no basis for a s198 election and a tax-paying Buyer should be entitled to make a fresh claim on a 'just and reasonable apportionment' of the purchase price (which may be more, or less, than the Allowances Statement above).

Company transfers and re-organisations

The general rule for a company acquisition is that you will 'walk into the shoes' of the existing capital allowances claim which can bring both positives and negatives.

A positive can be the inheritance of untapped claim potential in which past claims have not been optimised for commercial reasons. Where claims for plant or machinery have been pooled but not actually utilised there is a additional anti-avoidance ('Capital Allowances Buying') which is aimed at catching certain transfers of businesses who have excess of allowances beyond the assets balance sheet value.

A negative can be the inheritance of a balancing charge liability resulting from a previous inter-company transfer at tax written down value or significant past claim that has utilised most of the allowances (e.g. via Annual Investment Allowance or First Year Allowances).

Historical re-organisations from April 2012 can bring enhanced complexity because depending on their nature (some transfers are treated as sales) they can bring a need for elections to agree the value and transfer of fixtures assets on sale - if these have not been done properly, or on time (usually two years) the company being sold/acquired could have inherited a nil restriction.

Miscellaneous Points

Transactions that involve sale or lease and leaseback arrangements have additional restrictions (mostly for Buyers). There are also special rules for transactions involving leases of plant and machinery that are not commonly found in a property ('background plant and machinery) such as specialist processing/manufacturing equipment and most loose P&M.

If your business has made a claim for the new Super Deductions there are further disposal value rules that seek to recover a proportion of the enhances relief depending on the period of sale and amounts involved. Claims involving Research and Development Allowances also have separate disposal value and claim value calculations.

Planning and investigating the capital allowances position of a deal (asset or company) is almost always worthwhile to make sure your position is optimised; and if you have a question, please do not hesitate to contact


bottom of page