Capital allowances - create a pool to avoid taking a bath

17 March 2014

Since April 2012, it has been a requirement that for a buyer to claim capital allowances on commercial property, it must fix the value of qualifying expenditure with the seller, usually by means of a tax election under s198 of the Capital Allowances Act 2001.

A further tightening of the rules comes into effect from April 2014 whereby, in addition to the fixed value requirement, there will be an obligation on the seller to effectively claim such allowances where it has not previously done so, by “pooling” qualifying expenditure via its tax returns. Unless the seller brings such expenditure into account, then the buyer will be unable to claim these valuable tax reliefs.

What are Capital Allowances (CAs)?

CAs are tax reliefs available for qualifying expenditure on a wide range of fixtures which form part of the property. This may include 'integral features' such as electrical and cold water systems, lifts, escalators, space and water heating and external solar shading or more generally other plant and machinery. The extent of the qualifying expenditure is wide ranging and specialist advice should be sought to ensure that all such expenditure is taken into account. The qualifying items will be allotted to either a general pool which qualifies for an annual writing down allowance of 18% or, in the case of ‘integral features’, to a special pool at 8%.

A significant proportion of the sale price may be attributable to items qualifying for relief, perhaps as much as 25-30% of the property’s value. CAs can be claimed by property investors, but not by traders.  


In January 2012, Y buys from X a commercial property investment for £10m. X had not made any previous CA claims. The sale contract dealt with the requirement of apportioning a fixed value to the qualifying expenditure by obliging X and Y to enter into a s198 election for £2.5m. This will maximize Y’s claims for CAs.  The below table shows that £1m is allotted to a general pool and £1.5m to a special pool.

Y can therefore reduce its taxable profits by £300,000, £258,000 and £222,600 respectively for each of the tax years referred to above.

The requirement to pool expenditure

For a buyer to establish a claim for allowances, it will need to show that the seller has ‘pooled’ qualifying expenditure. This means that HMRC would expect to see a tax return filed with a capital allowances computation showing amounts pooled in earlier years and not yet fully relieved, amounts added in that chargeable period and any disposal values required to be brought into account.

Contractual issues

The sale contract should provide that the seller pools the expenditure by preparing and filing a tax return with a CA computation - or amends an existing tax return. This must relate to a chargeable period of the seller’s ownership – even if that is only for 1 day. The contract should also ensure that the fixed value requirement is met by way of a s198 election. Other points to be dealt with in the contract might be:

  • are specialist CA professionals required by the parties?
  • who should appoint and pay for these?
  • in which tax return should the seller’s claim be made?
  • when should the claim be made?
  • who will conduct any disputes with HMRC?
  • upon what basis and for what amount should a s198 election be made?

​“But I act for pension funds, charities and local authorities. They cannot claim CAs on properties they own. Isn’t this all irrelevant to them?”

Although such buyers cannot make any claims, unless you are able to persuade your seller to comply with the pooling and fixed value requirements, a future buyer will not be able to make a claim either. This could have an adverse effect on the future selling price of the property.

Be prepared

In preparing for sale, the seller should;

  • contact accountants to establish whether any CA claims have been made
  • make available to the buyer all relevant tax returns and computations
  • consider what disposal value it is prepared to agree upon for the purposes of a s198 election
  • check whether there is a pre-existing s198 election
  • consider if it is prepared to pool expenditure and effectively make a retrospective claim
  • consider the cost of pooling and whether the sale price reflects such additional cost

​Equally, a buyer should:

  • not accept bland answers from the seller to pre-contract enquiries on CAs - such as “not applicable” or “none available”
  • inspect the seller’s CA claims history and that of any former owners
  • ensure Accountants or specialist CA advisors are appointed early on in the transaction to assess the likely value of any qualifying expenditure in the building


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We welcome views and opinions about the issues raised in this blog. Should you require specific advice in relation to personal circumstances, please use the form on the contact page.

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