Capital Allowances

What are capital allowances?

A business that spends money purchasing a capital assets cannot claim a tax deduction for that expenditure. Instead, the Capital Allowances Act 2001 (CAA 2001) entitles taxpayers to claim capital allowances in respect of some items of capital expenditure. If claimed, capital allowances provide the claimant with an annual tax deduction that reduces the taxable profits of the claimant and, therefore, the tax that the claimant pays.

Capital allowances are not generally available in respect of buildings and have never been available for land. They are given only in respect of qualifying expenditure on the provision of plant and machinery for the purposes of a qualifying activity. The proportion of the value (and, therefore, the price) of a property that can be represented by the fixed plant in it will vary depending on the type of property it is.  For a hotel, the proportion of the value attributable to fixed plant may be substantial while for a retail shed, very little may be.

How are capital allowances calculated?

Different types of qualifying expenditure are subject to different rules or rates of allowances so expenditure of the same type is generally included in one pool while expenditure of another type is included in a separate pool. Expenditure on fixed plant is either allocated to a “general pool” or in the case of the following expenditure, a “special rate pool”. This comprises expenditure on:

1. thermal insulation added to an existing building (excluding residential property);
2. integral features such as:
   • electrical systems (including lighting systems);
   • cold water systems;
   • space or water heating systems, powered systems of ventilation, air cooling or air purification, and any floor or ceiling comprised of such systems;
   • lifts, escalators and moving walkways;
   • external solar shading; and
3. long life assets.

Generally, capital allowances are given as an annual writing down allowance (WDA), calculated on a reducing balance basis, at a rate applicable to the particular pool:

In addition, the annual investment allowance (AIA) gives 100% relief for a limited amount of qualifying expenditure (AIA limit) on qualifying plant and machinery. This is currently set at £200,000  per annum.

Why are capital allowances relevant if I am buying or selling commercial property?

A buyer of commercial property is entitled to claim allowances on existing fixtures so long as certain requirements have been satisfied by the seller before the sale. For example if the pooling requirement applies, this has to be satisfied by adding the fixtures expenditure to the relevant pool. As, technically, a seller may pool its expenditure without claiming, or claiming all of, the allowances it is entitled to this causes complications. For the buyer to claim an allowance, the seller will have to pool its fixtures expenditure, even if the seller does not wish to claim allowances.

If the seller has pooled its expenditure on the fixtures, the pooling requirement will automatically be satisfied and all that is needed in order for the buyer to be entitled to claim allowances on the fixtures, is for the “fixed value” requirement to be satisfied. If the seller will not agree to a section 198 election that records a reasonable apportionment to fixtures, it is open to the buyer to apply to a tribunal for a determination. However, it is unclear what procedures will need to be followed, and what evidence of the seller’s capital allowances position will be required, in order to obtain a tribunal determination.

In practice, there are many sellers who are entitled to claim allowances on fixtures, but will not have done so before selling the property. This may have been deliberate (for example, the seller has been making losses and has had no need for the allowances) or because the seller was unaware of the right to claim.

If a seller is entitled to claim allowances but has not done so, a buyer who wants to claim capital allowances should require a contractual commitment that the seller will pool its expenditure and the basis on which the section 198 election will be made.. This may require specialist capital allowances input and will certainly incur cost. The seller may wish the buyer to meet that cost. In addition, the seller may then want to share the allowances. The contract for sale of the property will need to deal with these issues.

If the seller has not pooled its fixtures expenditure by the time it comes to sell the property, the buyer (and subsequent buyers) will be unable to claim allowances on the fixtures in the property at the time of sale.

Although there is no time limit that requires a taxpayer to pool its fixtures expenditure within a specified period of incurring it, a section 198 election, or an application for a tribunal determination, must be made before the end of two years from the day the property was acquired.