What are Capital Allowances?
The Basics
Capital Allowances are a valuable tax relief available when a business or property investor purchases fixed assets. They are an entitlement but must be claimed by taxpayers via their annual tax returns submitted to HM Revenue & Customs (‘HMRC’).
Claims
If you own a commercial property or a furnished holiday letting in the UK and are a UK taxpayer, claiming Capital Allowances will reduce your tax payable and/or secure you a tax refund.
Capital Allowances claims can be made on the following property expenditure:
- new build, refurbishment and extension
- purchases of used property
- furnished holiday lettings
- contaminated land
- research and development expenditure
Depreciation shown in business accounts is not a tax-deductible expense. Instead, when preparing tax computations, it is replaced by Capital Allowances which offer valuable tax savings to the taxpayer. To ensure your claims are fully compliant and maximised, it’s important to work alongside your legal or finance professionals.
If you’re an accountant, we’d be happy to explore how we can support you and your clients.
Annual Investment Allowance (AIA)
The Annual Investment Allowance (AIA) lets you claim a 100% deduction on qualifying plant and machinery in the YEAR the asset is purchased — up to a limit of £1 million per year, which has been set permanently from January 2019.
What qualifies for AIA?
Plant and machinery used in your business including both new and second‑hand items typically qualify, excluding cars. Examples include:
- Office equipment (e.g. computers, desks)
- Commercial vehicles (vans, lorries, not cars)
- Specialist machinery for your business operations
How it works:
If, for example, you spend £800,000 on eligible assets in your accounting period, you can fully deduct the £800,000 from your taxable profits that year, improving your cash flow immediately.
If you exceed the £1 million cap, any surplus launched into the capital allowances pool and recovered via Writing Down Allowance (WDA).
Practical considerations:
Always claim AIA on eligible assets first before considering other allowances like First-Year Allowances (FYA) or WDA.
The AIA limit is apportioned if your accounting period is shorter or longer than 12 months.
AIA is available to most businesses sole traders, partnerships, limited companies.
Rates and Writing Down Allowances (‘WDA’s’)
Writing Down Allowances (WDA) apply to the balance of expenditure not covered by AIA or First-Year Allowances. Assets are grouped into either the main rate pool or special rate pool.
- Main rate pool: 18% per annum on a reducing balance basis, typically applies to most plant and machinery.
- Special rate pool: 6% per annum on a reducing balance basis, covering assets such as integral features (e.g. electrical systems, lifts) and high-emission vehicles.
Capital Allowances are governed by the Capital Allowances Act 2001 (CAA 2001), which allows businesses to claim tax relief on qualifying capital expenditure over time.
In addition to WDA, businesses may also claim:
- Annual Investment Allowance (AIA) – providing 100% relief on eligible expenditure up to £1 million.
- First-Year Allowances (FYA) – offering either 100% or 50% relief on qualifying new assets, depending on the type of asset and, in some cases, its location (such as within a Freeport or Investment Zone).
Together, these allowances can offer tax relief worth over 25% of the cost of a commercial property acquisition or refurbishment, making a significant difference to the financial return on investment.
Restrictions
Capital Allowances cannot be claimed by a developer where the property is trading stock or by non-tax paying entities such as charities, pension funds and government departments.
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