If you own or lease a commercial property, or a furnished holiday let, you could be missing out on significant tax relief. Capital allowances on property let you deduct the cost of certain fixtures, fittings, and building features from your taxable profits. The rules are detailed, but the savings can be substantial.

This guide covers what qualifies, how to calculate your claim, and the common pitfalls to avoid. We are ICAEW qualified accountants, and we deal with these claims regularly for clients across the UK, from a Manchester software consultancy with a converted warehouse office to a Bristol landlord with a portfolio of holiday lets.

What Are Capital Allowances on Property?

Capital allowances are a form of tax relief that lets you deduct the cost of certain capital assets from your taxable profits. For property, this typically covers fixtures and fittings that are integral to the building. Think heating systems, lifts, electrical installations, and fitted kitchens.

The key distinction is between the building itself (the structure) and the assets inside it. You generally cannot claim capital allowances on the structure of a building. But you can claim on the plant and machinery that is part of the building. This is where the value lies.

For a limited company, capital allowances reduce your corporation tax bill. For a sole trader or partnership, they reduce your income tax bill. The relief is available whether you own the property outright or hold a long lease.

Which Properties Qualify?

Not every property qualifies. The rules apply to properties used for a qualifying business purpose. The main categories are:

  • Commercial properties used for trade purposes: offices, shops, factories, warehouses, and similar.
  • Furnished holiday lets (FHLs) that meet the qualifying conditions: available for letting 210+ days per year, actually let 105+ days, and not occupied by the same person for more than 31 consecutive days.
  • Properties used in a trade where the building is integral to the business, such as a hotel or care home.

Residential properties that are not furnished holiday lets do not qualify for most capital allowances. Buy-to-let residential properties are excluded. If you let a standard residential flat in Leeds city centre, you cannot claim capital allowances on the fixtures. You would instead claim replacement of domestic items relief on white goods and furniture.

What Specifically Qualifies as Plant and Machinery?

HMRC defines plant and machinery broadly, but the list is specific. For property, the most common qualifying items include:

  • Heating and cooling systems: boilers, radiators, air conditioning units, ventilation systems.
  • Electrical systems: lighting, power sockets, wiring, switchgear.
  • Lifts and escalators.
  • Sanitary and plumbing installations: toilets, sinks, showers, pipework.
  • Fire safety systems: alarms, sprinklers, emergency lighting.
  • Security systems: CCTV, access control, intruder alarms.
  • Kitchen and catering equipment: fitted kitchens, ovens, fridges, extraction systems.
  • Furniture and furnishings: desks, chairs, shelving, carpets (in commercial properties).
  • Solar panels and renewable energy systems.

Items that do not qualify include the building structure itself: walls, floors, roofs, windows, doors (unless they are specialist doors like fire doors in a commercial kitchen). Landscaping and car parks also do not qualify.

How to Calculate Your Claim

There are several ways to claim capital allowances on property. The method depends on the type of asset and when you acquired the property.

Annual Investment Allowance (AIA)

The AIA lets you claim 100% relief on the cost of most plant and machinery in the year you buy it. The limit is £1,000,000 per year. This applies to new and second-hand assets. If you buy a commercial property and spend £80,000 on a new heating system and fitted kitchen, you can deduct the full £80,000 from your profits in that year.

The AIA is available to most businesses, including limited companies, sole traders, and partnerships. There are restrictions for partnerships where one partner is a company, and for properties held in a trust.

Writing Down Allowances (WDA)

If you cannot use the AIA (for example, because you have already used the £1,000,000 limit in the year), you can claim writing down allowances. These give you a percentage of the cost each year. The main rate is 18% per year on a reducing balance basis. The special rate (for integral features and long-life assets) is 6% per year.

For example, if you buy a commercial property with qualifying plant worth £200,000 and you have no AIA remaining, you claim 18% of £200,000 (£36,000) in year one. In year two, you claim 18% of the remaining £164,000 (£29,520), and so on.

Full Expensing

Limited companies can also use full expensing for new plant and machinery. This gives 100% relief in the year of purchase, similar to the AIA but without the £1,000,000 cap. It applies to new assets only, not second-hand. For a company buying a new air conditioning system for £150,000, full expensing lets you deduct the full amount in year one.

Special Rules for Commercial Property Purchases

When you buy a commercial property, the purchase price typically includes the building structure and the qualifying plant. You need to apportion the price between the two. This is where many claims go wrong.

HMRC expects a reasonable apportionment. You can use a surveyor or specialist capital allowances consultant to prepare a detailed analysis. The cost of the survey is itself allowable as a capital allowance claim.

If the seller has previously claimed capital allowances on the property, you need to know the tax written-down value. The seller should provide a capital allowances statement as part of the sale. If they do not, you may need to reconstruct the position from available records.

There are also pooling rules. When you buy a property, the qualifying plant enters a pool. You claim writing down allowances on the pool each year. If you sell the property, you may need to make a balancing adjustment to the pool.

Furnished Holiday Lets: A Special Case

Furnished holiday lets are treated as a trade for capital allowances purposes. This means you can claim on furniture, furnishings, and equipment, as well as the integral features of the property. A typical FHL claim might include beds, sofas, tables, chairs, curtains, carpets, a washing machine, a dishwasher, a television, and the heating system.

The AIA applies to FHLs, so you can claim 100% relief on qualifying items in the year you buy them. If you spend £15,000 furnishing a holiday let in the Lake District, you can deduct the full £15,000 from your FHL profits in that year.

Be careful with the qualifying conditions. HMRC reviews FHL claims closely. If your property does not meet the letting conditions in a particular year, you lose the capital allowances treatment for that period.

Common Mistakes and Pitfalls

We see the same errors repeatedly. Here are the ones to watch for:

  • Claiming on residential buy-to-let properties. Standard residential lets do not qualify. You cannot claim capital allowances on a flat in Soho or a house in Digbeth unless it is a furnished holiday let.
  • Claiming on the building structure. The walls, roof, and floors are not plant. Only the fixtures and fittings inside qualify.
  • Not apportioning the purchase price correctly. HMRC can challenge an unreasonable apportionment. If you claim 50% of the purchase price as plant, expect questions.
  • Ignoring the pooling rules. When you sell a property, you must adjust the pool. If you do not, you overclaim allowances.
  • Missing the deadline. You can amend a corporation tax return within 12 months of the filing date. For sole traders, you have until 31 January following the tax year. If you miss the deadline, you can make a separate capital allowances claim, but the process is more complex.

How to Make a Claim

The process depends on your business structure. For a limited company, you include the capital allowances claim in your corporation tax return (CT600). You complete the capital allowances computation as part of the tax computation. For a sole trader or partnership, you include the claim in your self assessment return (SA100 or SA800).

You need to keep detailed records of the assets you are claiming on. This includes invoices, contracts, and any surveyor reports. HMRC can ask for evidence, especially for large claims.

If you are buying a commercial property, instruct a surveyor or capital allowances specialist before completion. They can identify the qualifying plant and prepare the apportionment. The cost is deductible, and the claim can be significant. A typical commercial property might have 10% to 30% of the purchase price attributable to qualifying plant.

For example, a client of ours bought a former retail unit in the Northern Quarter of Manchester for £420,000. The survey identified £92,800 of qualifying plant, including the heating system, electrical installation, and fitted shop fittings. The client claimed the full amount under the AIA, reducing their corporation tax bill by £23,200 in year one.

Structures and Buildings Allowance (SBA)

There is a separate relief for the cost of the building structure itself. The Structures and Buildings Allowance gives 3% relief per year on the cost of constructing a new commercial building. This applies to the structure, not the plant. The relief lasts for 33 years and 4 months.

The SBA is available for new builds and for significant renovations of existing buildings. It applies to commercial properties, including offices, shops, factories, and hotels. Residential properties do not qualify, except for certain purpose-built student accommodation.

If you spend £500,000 building a new office in the Jewellery Quarter of Birmingham, you can claim £15,000 per year (3% of £500,000) for 33 years. This is separate from any capital allowances claim on the plant and machinery inside the building.

When to Get Professional Help

Capital allowances on property are not straightforward. The rules are detailed, and HMRC challenges claims that are not properly supported. If you are buying a commercial property, or if you have a portfolio of furnished holiday lets, it pays to get specialist advice.

We handle capital allowances claims as part of our broader accounting services. Our ICAEW qualified team can review your property portfolio, identify qualifying assets, and prepare the claim. We also work with surveyors and capital allowances specialists for larger claims.

If you are unsure whether your property qualifies, or if you have a claim from a previous year that you missed, speak to us. The deadline for amending a return is tight, but we can often still make a claim through a separate capital allowances computation.

For more on how capital allowances fit into your overall tax planning, read our corporation tax blog or visit our fundamentals page for a broader overview of business tax reliefs.