Guide

A guide to capital allowances in the UK

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A capital allowance is UK tax relief for ‘capital’ expenditure on business assets. In this insight we provide guidance on the potential value of capital allowances, the different types of allowance and who is eligible to claim.

Capital investment creates an asset for the longer-term and the spend is usually recorded in the business’s accounts on the balance sheet as a fixed asset. Claiming a capital allowance reduces the business’s annual taxable income, which in turn reduces the tax it has to pay.

Capital allowances may be available on a significant proportion of the expenditure incurred. Assets that attract greater or faster tax relief include air-conditioning and water systems through to data cabling, lighting and many other assets.

How do capital allowances work?

There are various types of capital allowances and rates available. These dictate the percentage of the asset’s cost that is written-down each year for tax. 

What are the different types of capital allowance?

The two main types of capital allowances are: 

  1. plant and machinery allowances; and 
  2. structures and buildings allowances. 

Another similar property tax relief is also available called ‘land remediation relief’ but this is a corporation tax relief, not a capital allowance.

Plant and machinery allowances

Plant and machinery (P&M) allowances are available for spend on business equipment, including many ordinary ‘fixtures’ in commercial property and the common parts of multi-let residential properties. Fixtures are assets that become part of the property in law.

In a real estate setting, P&M assets are divided into two main categories:

  1. Special rate P&M: includes “integral features” (i.e. electrical power and lighting; hot and cold water; heating, ventilation and cooling; lifts and escalators; and external solar shading), adding insulation to existing buildings to retain heat, solar panels, and “long-life assets” (i.e., P&M with a useful economic life of at least 25 years), and
  2. Main pool assets: are all other P&M that is not special rate. 

P&M allowances are available at several rates depending on the type of P&M and when the money was spent:

  • 130% super-deduction: This is a first-year allowance that applies to spend on new P&M after 1 April 2021 and before 1 April 2023 and gives a 130% tax deduction (i.e. 30% more than the actual spend). However, contracts to buy the assets must be entered into after 3 March 2021.
  • 100% full expensing: The Chancellor announced in the 2023 Spring Budget ‘full expensing’ for companies investing in new items of P&M qualifying for the main pool. Expenditure must be incurred after 1 April 2023 and before 1 April 2026.
  • 100% annual investment allowance: The annual investment allowance (AIA) is available to immediately shelter up to £1,000,000 of qualifying spend on P&M each year. This potentially accelerates a substantial proportion of the tax relief. In the Spring Budget 2023, the AIA was permanently set at £1,000,000 for qualifying expenditure on P&M incurred from 1 April 2023.
  • 50% SR allowance: Applies to investment by companies on new P&M after 1 April 2023 and before 1 April 2026 and gives a 50% first-year allowance for investment in special rate P&M assets. The contracts must be entered into after 3 March 2021. 
  • 18% writing-down allowance: For items classified as main pool P&M, the default rate if none of the rates above apply is 18% a year on a reducing-balance basis.
  • 6% writing-down allowance: For items classified as special rate pool P&M, the default rate if none of the rates above apply is 6% a year on a reducing-balance basis.

3% structures and buildings allowances

Structures and buildings allowances (SBAs) are available at a flat-rate 3% for spend on structures and buildings that do not qualify for P&M allowances or land remediation relief. They are not given for residential property.

150% land remediation relief

This is given to companies that clean up contaminated land and buildings or bring long-term derelict land back into economic use. It is a 150% relief from corporation tax and is available to developers, investors and occupiers, and for both commercial and residential property.

How do capital allowances effect tax?

The following example shows how capital allowances reduce the amount of tax payable, assuming a company tax rate of 25%. In the example below capital allowances is able to reduce the amount of tax payable by £250,000

Without capital allowances

Profit before tax £2,000,000
Capital allowances 0
Taxable profit £2,000,000
Tax payable @25% £500,000


With capital allowances

Profit before tax £2,000,000
Capital allowances (£1,000,000)
Taxable profit £1,000,000
Tax payable @25% £250,000

 

What are the benefits of claiming capital allowances?

As the example above shows, claiming capital allowances allows you to claim a proportion of your investment expenditure back against your taxable income or profits. This reduces the amount of tax payable on your profits and frees up cashflow for further investment in your business.

Who can claim capital allowances?

Capital allowances are available to property occupiers and investors, and both income and corporation tax payers. They are a valuable incentive to almost all businesses.

If you have recently incurred capital expenditure to buy, build or refurbish commercial property and you pay income or corporation tax then it is likely that you will be able to benefit from capital allowances. 

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