Capital allowances
Capital allowances allow businesses (as well as individuals and partnerships) to claim tax relief on certain capital expenditure. These allowances help to reduce your taxable profit, making this a valuable tax relief for businesses. Relief is generally available on qualifying capital spend used in the business, such as plant and machinery. The main exception is residential property, where relief is generally not available.
Capital allowances are not available on residential property.
These allowances help reduce your taxable profit, making it a valuable tax-saving opportunity for businesses.
What are the rates of relief for capital allowances?
The rates of relief for capital allowances vary, ranging from 100% to 3% depending on the type of expenditure.
Specific allowances, such as the Structures and Buildings Allowance (“SBA”), are available for costs incurred in the construction, conversion, or renovation of non-residential buildings and relief is given at 3% a year, providing the conditions for relief are met and an election is made to HMRC.
Other allowances, such as the Annual Investment Allowance gives 100% relief but only if claimed in the year of purchase on qualifying assets up to a maximum spend of £1m per annum.
The relief available under capital allowances can be really beneficial and significantly reduce a businesses tax liability, and therefore talking to your accountant or tax advisor when making capital purchases is recommended.
Commercial property transactions
The sale and purchase of commercial property brings with it its own set of rules in respect of capital allowances.
During the period that the seller has owned the property, they will have accumulated fixtures within the property which would qualify for capital allowances. These will likely be sold with the property, but a decision has to be made as to whether the seller retains the benefit of these allowances or whether they are transferred to the buyer.
The simplest way to achieve this is by including a section 198 election, signed by both parties in the sale agreement. There are very stringent requirements around what constitutes a valid election and the timings for making an election and for this reason it is recommended that tax advice is sought when commercial property transactions are taking place to ensure that the benefit of the capital allowances is not lost entirely—a worst-case scenario for both parties.
How can we help?
Capital allowances can be complex, and what qualifies for relief isn’t always straightforward. There’s a large body of case law that governs the application of these allowances, and many businesses miss out on claiming what they’re entitled to, and therefore lose valuable tax relief.
At Stratos, we specialise in identifying eligible capital allowances and ensuring you maximise your tax relief. We conduct an independent review of your business’s expenditure, carefully considering all available allowances, and providing tailored advice to help you reduce your tax liability.
Why Stratos?
We take the time to understand your individual circumstances before advising on the best approach to your capital allowance claim. This ensures the process is handled as efficiently as possible, helping you maximise tax benefits while giving you confidence that everything has been managed properly.
Areas we can support:
- Expert analysis of capital expenditure based
- Comprehensive reviews of commercial property transactions
- Tailored advice to maximise claims
- Support with HMRC elections and tax filings
FAQs
Capital allowances let businesses claim tax relief on certain qualifying capital expenditure, such as plant and machinery, instead of deducting accounting depreciation which is disallowable for tax purposes.
The Annual Investment Allowance is a valuable allowance which can give 100% relief on qualifying capital expenditure up to the relevant annual limit of £1 million, subject to meeting the detailed requirements to qualify.
Yes. Claims can apply where a property includes qualifying fixtures, integral features, plant, machinery or qualifying construction expenditure.
Potentially. A review can identify whether qualifying expenditure has been missed, incorrectly classified or not fully evidenced and determine whether allowances can still be claimed.
Capital allowances should be claimed on the tax return.
There are restrictions on claiming capital allowances and for this reason seeking advice is always recommended.
Some examples of where capital allowances may not be available include:
- Residential property will not qualify
- Assets not legally owned by the business (e.g., under deposit or lease) are typically excluded
Capital allowances reduce your taxable profits, which in turn lowers the amount of tax you need to pay. When filing your tax return, you will include the capital allowances in your calculation to ensure you are taxed only on your profits after allowances have been applied.
We can support you with the self-assessment tax return process, for more information on this visit self-assessment tax return.
It is possible to backdate claims for previous years if you have note utilised the most of your capital allowances. It is crucial you understand what assets you can claim capital allowances on and what allowances can be carried forward.
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Ben Hall
Tax Associate
Ben became a valuable member of Stratos in October 2024, after graduating from the University of Law with a master’s degree in Law, Business and Management with Distinction.
