Capital Allowances Commercial Property UK — Plant and Machinery, AIA, Fixtures, and Structures Allowance

Plant and Machinery Allowances — What Qualifies in Commercial Property?

Plant and machinery allowances (PMAs) are available under CAA 2001 Part 2 on capital expenditure incurred on the provision of plant or machinery for the purposes of a qualifying activity (typically a trade, property business, or furnished holiday letting business): (a) Plant and machinery definition: HMRC's definition of plant and machinery covers all items of equipment and apparatus used in the business — other than the building structure itself; in commercial property, qualifying plant and machinery typically includes: (i) cold water systems; (ii) heating and ventilation systems (HVAC); (iii) electrical systems (wiring; lighting; power supply); (iv) lifts and escalators; (v) security and CCTV systems; (vi) fire alarm and suppression systems; (vii) data cabling and communications infrastructure; (viii) fitted furniture in offices and commercial kitchens; (ix) signage (where not part of the building structure); (b) The distinction between plant and the building structure: expenditure on the building structure itself — walls, floors, ceilings, the roof, foundations, windows — does not qualify as plant and machinery; HMRC's Capital Allowances Manual (CA21140) provides detailed guidance on the distinction; the test is whether the item is the 'setting' in which business activities occur (not qualifying) or the apparatus with which activities are carried out (qualifying); (c) Integral features: CAA 2001 s.33A identifies 'integral features' — items embedded in buildings that qualify as plant and machinery but are treated as a special rate pool (written down at 6% per year rather than 18%); integral features include: electrical systems (including lighting); cold water systems; space or water heating systems; powered systems of ventilation, air cooling, or purification; lifts; external solar shading; (d) Thermal insulation: CAA 2001 s.28 allows a deduction for expenditure on thermal insulation of an existing industrial building — treated as plant and machinery; (e) Enterprise zones and freeports: enhanced capital allowances may be available for commercial property investment in designated enterprise zones and freeport tax sites.

• Qualifying plant and machinery: HVAC systems; electrical systems; lifts; fire alarm; security/CCTV; data cabling; fitted commercial kitchens; lighting — all qualifying items in commercial property
• Building structure exclusion: walls, floors, ceilings, roof, foundations, and windows are not plant and machinery and do not qualify for PMAs
• Integral features (special rate pool): electrical systems; cold water; heating; ventilation; lifts — written down at 6% per year (special rate pool) rather than 18% (main pool)
• HMRC CA21140: detailed guidance on the plant/structure distinction; use this to identify qualifying items in any commercial property acquisition or fit-out
• Enterprise zones/freeport enhanced allowances: check HMRC guidance for designated areas where 100% first-year allowances may be available

Annual Investment Allowance — £1 Million 100% First-Year Deduction

The Annual Investment Allowance (AIA) allows a business to deduct 100% of qualifying plant and machinery expenditure in the year it is incurred, up to the AIA limit: (a) AIA limit: the AIA limit has been permanently set at £1 million per year from 1 April 2023 (for companies) and 6 April 2023 (for individuals and partnerships); prior to this, the AIA had fluctuated between £25,000 and £1 million; the permanent £1 million limit is a significant incentive for commercial landlords to invest in qualifying plant and machinery; (b) Who can claim the AIA?: the AIA is available to: (i) sole traders and individuals; (ii) partnerships (including mixed partnerships with companies); (iii) companies — but not close investment holding companies (CIHCs) that hold investments; close investment holding companies that hold commercial property as investments are excluded from the AIA; (c) AIA and commercial property lettings: a UK property business (letting commercial property) qualifies for the AIA on expenditure on plant and machinery used in the property business — including fixtures in the let property; a landlord letting commercial property can claim the AIA on qualifying capital expenditure up to £1 million per year; (d) The AIA and the main pool: where expenditure exceeds the AIA (or where the AIA is not available), qualifying plant and machinery is allocated to the main pool (written down at 18% per year on a reducing balance) or the special rate pool for integral features (written down at 6% per year); (e) Year of claim: the AIA deduction is claimed in the tax return for the accounting period in which the expenditure is incurred (the date on which the obligation to pay becomes unconditional under a contract); for plant and machinery under a hire purchase agreement, the expenditure is treated as incurred when the contract is entered into; (f) Short-life assets: assets with an expected useful life of less than 8 years can be elected into a 'short-life asset' pool — if the asset is disposed of within 8 years, the unrelieved balance is written off on disposal rather than continuing to attract the slow 18% writing-down allowance.

• AIA = 100% first-year deduction up to £1m per year (permanent from April 2023); invest in qualifying plant and machinery to obtain immediate relief
• Commercial landlords qualify: UK property business (letting commercial property) can claim AIA on qualifying fixtures and equipment up to £1m
• CIHCs excluded: close investment holding companies holding investments cannot claim AIA; structure property businesses to avoid CIHC status if AIA is important
• Main pool (18%) and special rate pool (6%): expenditure above the AIA or where AIA is unavailable; integral features at 6%; other P&M at 18% reducing balance
• Short-life asset elections: elect assets with under 8-year life into a short-life pool; unrelieved balance written off on disposal within 8 years

Fixtures — The s.198 Election and Pooling Requirements

Fixtures are items of plant and machinery that have become permanently attached to a building — for example, a central heating boiler, an electrical distribution board, or a fitted kitchen. The capital allowances regime has special rules for fixtures that are designed to ensure that the same expenditure is not claimed twice (by both the seller and the buyer of a property): (a) Pooling requirement: before a buyer of a commercial property can claim capital allowances on fixtures in the property, the seller must have pooled the expenditure on those fixtures in a capital allowances pool (i.e. the seller must have claimed or could have claimed capital allowances on the fixtures); if the seller never pooled the fixtures, the buyer cannot claim on acquisition; this 'pooling requirement' was introduced by Finance Act 2012 and applies to purchases on or after 1 April 2012 (companies) / 6 April 2012 (others); (b) The s.198 election (fixed value requirement): where the seller has pooled the fixtures, the buyer and seller must enter into a joint s.198 election within 2 years of the purchase to fix the apportioned value of the fixtures; the election fixes the value at which the seller is treated as having disposed of the fixtures and the buyer is treated as having acquired them; the amount elected must be between £1 and the original cost of the fixtures (or the price paid by the buyer, if lower); in practice, s.198 elections are commonly set at the minimum allowable value (often £1) to maximise the seller's pool value and minimise the buyer's acquisition value; (c) Importance of s.198 elections on property acquisition: a buyer who fails to agree a s.198 election within 2 years loses the right to claim any capital allowances on the acquired fixtures; this is a common and costly mistake; every commercial property acquisition should include a capital allowances review and a s.198 election as part of the conveyancing process; (d) Capital allowances survey: a specialist capital allowances surveyor (RICS or Chartered Tax Adviser) can carry out a capital allowances survey to identify and value the qualifying fixtures in a property being acquired; the survey provides the evidential basis for the s.198 election and the subsequent capital allowances claim; (e) HMRC clearance: where the parties cannot agree a value, the s.199 election (for transfers within a group) or an application to the First-tier Tribunal is available to determine the value.

• Pooling requirement (Finance Act 2012): seller must have pooled fixtures before buyer can claim on acquisition; unpooled fixtures are lost to both parties on sale
• s.198 election: joint buyer and seller election within 2 years of purchase to fix the apportioned value; election amount between £1 and original cost
• 2-year deadline: missing the s.198 election deadline permanently disqualifies the buyer from claiming on the acquired fixtures — a costly conveyancing oversight
• Capital allowances survey: specialist surveyor identifies and values qualifying fixtures before exchange; essential for maximising s.198 election position
• Common negotiating position: sellers prefer the election at the minimum value (often £1) to preserve their pool balance; buyers prefer a higher value to maximise their acquisition cost

Structures and Buildings Allowance and the Abolition of FHL Allowances

Two further capital allowances provisions are important for commercial property owners: (a) Structures and Buildings Allowance (SBA): the SBA was introduced in October 2018 for new commercial structures and buildings (and qualifying renovation works); the SBA provides a straight-line deduction of 3% per year of qualifying construction expenditure over 33.3 years; what qualifies for SBA?: expenditure on the construction, renovation, or conversion of a non-residential building or structure — commercial offices; shops; factories; warehouses; hotels; the SBA does NOT cover residential property; the SBA does NOT cover plant and machinery (which is covered by PMAs above); a building is non-residential if it is not used for residential purposes — a hotel qualifies; a purpose-built student accommodation block qualifies; (b) SBA and mixed-use: where a building is part residential and part commercial, only the commercial proportion of expenditure qualifies for the SBA; (c) SBA writing-down rate: the rate has been 3% per year since 1 April 2020; the SBA cannot be accelerated or frontloaded — it is always straight-line at 3%; (d) Abolition of furnished holiday let (FHL) allowances from April 2025: until 5 April 2025, FHL businesses (short-term holiday lets meeting the HMRC qualifying conditions) were entitled to claim plant and machinery allowances (including the AIA) on furniture, fittings, and equipment in the let property; from 6 April 2025, the FHL regime is abolished — FHL income is taxed as part of the property income business (for individuals) or as trading income (for companies, if applicable); FHL properties no longer qualify for PMAs; the AIA and writing-down allowances are no longer available on FHL furniture and fittings; ongoing allowances on previously-pooled FHL assets continue to be available on the existing pool balances until they are fully written off; (e) Capital Goods Scheme (VAT): separate from capital allowances, VAT-registered commercial property owners who have opted to tax their property must comply with the VAT Capital Goods Scheme for 10 years after the completion of works costing over £250,000 (net of VAT) — requiring annual adjustments to VAT recovery where the taxable/exempt use of the property changes.

• SBA (3% straight-line): available on new commercial structures and buildings; from October 2018; 33.3-year deduction period; does not cover residential property or plant and machinery
• SBA covers: construction, renovation, conversion of non-residential buildings — offices; shops; factories; warehouses; hotels; student accommodation
• FHL plant and machinery allowances abolished from 6 April 2025: FHL properties no longer qualify for AIA or PMAs; ongoing pools continue for existing assets
• FHL abolition impact: significant loss for FHL investors — AIA on furniture and fittings (100% in year one) was a major incentive for FHL over buy-to-let
• VAT Capital Goods Scheme: 10-year adjustment period for VAT-registered commercial property owners with works over £250,000; applies separately from capital allowances

Frequently asked questions