Capital allowances are one of the most consistently underclaimed reliefs in UK commercial property. On a £1m office fit-out, getting them right typically saves £40,000–£100,000 of corporation tax. Getting them wrong—or failing to make a Section 198 election on a second-hand purchase—can permanently destroy a six-figure allowance pool. This guide covers what you can claim, how the rules interact, and the pre-completion steps that protect the position. For the wider picture across SDLT, VAT and structuring, start with our complete UK commercial property tax guide.
Quick answer: Capital allowances on commercial property split into three streams — plant and machinery (heating, ventilation, electrical, lifts, integral features), Structures and Buildings Allowance (3% straight-line on construction cost), and AIA / Full Expensing on new plant. On a new commercial fit-out, 20–40% of total cost typically qualifies as plant and machinery. On second-hand purchases, a Section 198 election at completion is essential to preserve the claim.
This article covers the 2026/27 position. It assumes the building is owned by a UK company (most commercial property is). The principles also apply to individual landlords and partnerships, but the AIA and Full Expensing positions differ slightly for unincorporated businesses.
1The three streams of allowances
Capital allowances on a commercial property come from three different statutory regimes, each with its own rates and rules:
| Stream | What it covers | 2026/27 rate |
|---|---|---|
| Plant & Machinery (P&M) | Heating, ventilation, electrical, lifts, integral features, equipment | AIA 100% (£1m cap), Full Expensing 100% (no cap, new only), WDA 14% main / 6% special rate |
| Structures & Buildings Allowance (SBA) | The building shell and structure (non-residential) | 3% straight-line per year |
| Land | Bare land value | No allowances available |
The three streams are not interchangeable: an item is either P&M, or SBA, or land. Getting the segregation right on a new build or fit-out is the single biggest determinant of the total tax relief available.
2Plant and machinery: the big one
Within any commercial building, there is “plant and machinery” — the equipment and systems that make the building functional. The major categories are:
Integral features (special rate pool, 6% WDA)
- Electrical systems (including lighting)
- Cold water systems
- Space or water heating systems
- Ventilation, air-cooling or air-purification systems
- Lifts, escalators and moving walkways
- External solar shading
Main pool items (14% WDA)
- Furniture, fittings and equipment
- Computer hardware and IT
- Kitchen equipment (where not integral)
- Movable partitioning
- Security systems
- Plant used in the trade
Long-life assets (special rate pool, 6% WDA)
Assets with an expected economic working life of 25+ years (when new). Generally relevant for major industrial plant rather than typical office fit-out.
💡 What is NOT plant and machinery
The building itself (walls, floors, roof, doors, windows) is not P&M — it goes into SBA or is non-qualifying. The Land is not P&M. Permanent structural items aren’t P&M. The “setting in which the trade is carried on” is not P&M.
3AIA and Full Expensing: 100% in year one
AIA and Full Expensing are first-year allowances that give 100% relief in the year of expenditure — the full cost is deducted against profit immediately, rather than being written down over many years.
Annual Investment Allowance (AIA)
AIA gives 100% relief on the first £1 million of qualifying plant and machinery expenditure each year, for both companies and unincorporated businesses. Try our capital allowances calculator to estimate the relief on an asset purchase. It applies to:
- New AND second-hand plant
- Both main-pool and special-rate pool items (including integral features)
- Most P&M except cars
Full Expensing
Full Expensing is companies-only and applies to new (not second-hand) main-pool plant only. The rate is 100% with no upper limit. For new special-rate pool items (integral features, long-life), the equivalent is a 50% first-year allowance with the balance written down at 6% per year.
| Allowance | Who | New / Second-hand | Limit | Rate |
|---|---|---|---|---|
| AIA | Companies & individuals | Both | £1m/yr | 100% |
| Full Expensing (main pool) | Companies only | New only | No cap | 100% |
| 50% FYA (special rate) | Companies only | New only | No cap | 50% + 6% WDA |
| Writing-down allowance (main) | Companies & individuals | Both | None | 14% |
| Writing-down allowance (special) | Companies & individuals | Both | None | 6% |
The optimal claim strategy depends on the mix of new vs second-hand spend, main pool vs special rate pool, and whether spend exceeds £1m. For most fit-outs, AIA on integral features and Full Expensing on new main-pool plant is the right combination.
Mid-fit-out or planning one?
We model the capital allowances claim before the work starts — segregation, election strategy and cash-flow benefit. Fixed-fee.
4Structures and Buildings Allowance
SBA gives 3% per year straight-line relief on the construction cost of non-residential buildings. It applies to the structural element — walls, floors, roof, doors — not to land or P&M (which is claimed separately under the rules above).
SBA started at 2% in October 2018 and rose to 3% in April 2020. The allowance runs for approximately 33 years (1/3% = 33.3 years to claim the full cost). If you sell the building before then, the buyer continues the claim for the remainder of the period.
What qualifies for SBA
- Construction costs of new non-residential buildings (offices, factories, warehouses, retail, hotels)
- Construction costs of conversions and renovations of existing non-residential
- Construction costs of converting residential to commercial use
- Professional fees directly associated with construction (architects, surveyors, engineers)
What does NOT qualify
- The land itself
- P&M (claimed under the P&M rules above instead)
- Residential buildings (other than student accommodation in specific cases)
- Costs of acquiring the land or existing building
⚠️ The SBA “evidence requirement”
To claim SBA, you need a written “allowance statement” detailing the construction cost, the date qualifying use began, and certain other particulars. Without an allowance statement, no SBA is available — not for you, not for any future owner. This is a common oversight that should be fixed at construction, not after.
5Section 198 election: the second-hand acquisition trap
When you buy an existing commercial property, the P&M inside it has typically been claimed by the seller during their ownership. Without a joint Section 198 election fixing the transfer value of that P&M, the buyer’s ability to claim allowances on it can be lost entirely.
How the election works
A Section 198 election is a written agreement between buyer and seller fixing the value of the fixtures (P&M attached to the building) for tax purposes. The election value:
- Cannot exceed the seller’s original cost
- Cannot exceed the actual sale price
- Must be agreed and made within 2 years of completion
- Both parties must sign the election
What goes wrong
The most common mistakes:
- No election made at all. Buyer has no claim on the existing P&M, permanently.
- Election made at £1. Common “nominal” election that allocates effectively zero value to P&M — destroying the buyer’s claim. Buyer’s solicitor often agrees this without involving a tax adviser.
- Election agreed too late. The 2-year window from completion is hard, and HMRC will not grant extensions.
- No allowance statement on subsequent sale. Breaks the SBA chain for all future owners.
6Worked example: £500k office fit-out
A trading company spends £500,000 on a new office fit-out in 2026/27. The cost breaks down as follows:
| Cost element | Amount | Allowance treatment |
|---|---|---|
| Electrical systems and lighting | £80,000 | Integral features (special rate) |
| Air conditioning & ventilation | £120,000 | Integral features (special rate) |
| Furniture and IT equipment | £70,000 | Main pool P&M |
| Kitchen and break-out fittings | £30,000 | Main pool P&M |
| Movable partitioning | £25,000 | Main pool P&M |
| Decoration and finishes | £85,000 | Mostly non-qualifying (SBA on shell only) |
| Structural alterations | £90,000 | SBA (3%/year) |
| Total | £500,000 |
Year 1 capital allowances claim
- AIA on integral features (£80k + £120k = £200k): 100% = £200,000
- Full Expensing on new main pool (£70k + £30k + £25k = £125k): 100% = £125,000
- SBA on structural alterations (£90k): 3% = £2,700
- Total year-1 deduction: £327,700
At a 25% corporation tax rate, the year-1 tax saving is approximately £81,925 — around 16% of the total fit-out cost recovered as tax relief in year one. SBA continues at £2,700/year for ~33 years on the structural element. Non-qualifying spend of £85k receives no allowances. Use our corporation tax calculator to model the saving against your specific profit level, including marginal relief between £50,000 and £250,000.
Without proper segregation
If the same £500k were claimed as “fit-out” without segregating P&M from non-qualifying spend, a defensive claim might attribute only £150–200k as P&M instead of £325k. The year-1 saving would drop to around £45k — a £37k difference. Over time, the gap closes (the missed P&M would have been written down on the building anyway) but the cash-flow value of the immediate deduction is significant.
7Practical steps to protect the claim
- On new build or fit-out: get a capital allowances surveyor to segregate the spend at the point of construction, not afterwards. Detailed contractor cost breakdowns make this far more reliable than retrospective analysis.
- On a property acquisition: instruct a tax adviser to liaise with the seller on the Section 198 election before exchange. Negotiate the election value as part of the deal, not after. Aim for the maximum supportable value.
- For SBA: prepare the allowance statement at the time of construction. Keep it with the property records. If the property changes hands, the statement must transfer.
- For ongoing claims: maintain a capital allowances register tracking the pool balances. Most accounting software treats this poorly.
- Coordinate with the VAT position: if the property is opted to tax, input VAT on construction and fit-out is recoverable in addition to the capital allowances claim. See our VAT and option to tax guide.
- On disposal: agree a Section 198 election with the buyer. The buyer wants a high value (more allowances for them); the seller wants a low value (less balancing charge for them). The position should be modelled before negotiation.
📋 Key takeaways
- Three allowance streams — plant and machinery, SBA at 3%, and (separately) AIA / Full Expensing for new plant
- On a typical fit-out, 20–40% of total cost qualifies as P&M — frequently underclaimed
- AIA gives £1m at 100% to companies and individuals; Full Expensing gives unlimited 100% to companies on new main-pool plant
- Section 198 elections are critical on second-hand acquisitions — a missing or £1 election permanently destroys the claim
- SBA requires a written allowance statement — without it, no claim is available, ever
- Get a capital allowances surveyor or specialist tax adviser involved BEFORE construction or completion, not after
Frequently asked questions
What is a Section 198 election?
A joint election between the buyer and seller of a commercial property fixing the value of the P&M (fixtures) for capital allowances purposes. Without it, the buyer can lose access to a significant allowances pool. Must usually be made within 2 years of completion.
What is the Annual Investment Allowance?
The AIA gives 100% relief on the first £1 million of qualifying P&M expenditure each year. Applies to most plant including integral features, for both companies and unincorporated businesses. AIA can be combined with Full Expensing to optimise the overall claim.
What is Full Expensing?
A 100% first-year allowance on new (not second-hand) main-pool plant and machinery for companies, with no upper limit. Made permanent in the 2024 Spring Budget. For new special rate pool items, the equivalent is a 50% first-year allowance.
What is the Structures and Buildings Allowance?
SBA gives 3% per year straight-line relief on the construction cost of non-residential buildings (offices, factories, warehouses, retail). Applies to the building shell and structure but NOT to land or P&M. Runs for approximately 33 years.
How much of a commercial fit-out qualifies for capital allowances?
Typically 20–40% of total cost qualifies as P&M (heating, ventilation, electrical, lifts, integral features). The exact percentage depends on the type of building, the scope of works, and how carefully the cost is segregated.
Can I claim capital allowances on a second-hand property?
Yes, but the claim depends on the seller’s position and the Section 198 election. The seller will have claimed allowances on the P&M; without a Section 198 election fixing the transfer value, the buyer’s claim is restricted. The election must usually be made within 2 years of completion.
Is mortgage interest deductible like capital allowances?
Mortgage interest on commercial property loans IS deductible against rental income (unlike Section 24 for residential individual landlords) — but it’s an income deduction, not a capital allowance. Capital allowances apply to qualifying capital expenditure, not financing costs.
📚 Related reading
- Should You Incorporate Your Portfolio? — Capital allowances are available to companies on the same basis as individuals — but the structure shapes everything else.