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Capital Allowances: fixtures in commercial buildings

03 September 2014 #Commercial Real Estate

Rule changes from 1 April 2014 could have serious effects for commercial property owners.


When a company calculates its taxable profits, it is not entitled to a deduction for depreciation.  Instead, it may claim capital allowances for capital expenditure on integral features eg lifts on a reducing balance basis and on other plant and machinery, again on a reducing balance basis.

If a company wishes to claim capital allowances, its expenditure on integral features must be pooled into its special rate pool and its expenditure on other plant and machinery must be pooled into its general rate pool.  Allowances are claimed on the balance of the tax written down value in the pool each year. 

To be able to claim any capital allowances on these fixtures, a purchaser of a commercial building such as a factory or offices must jointly elect with the seller in the sale contract to fix the value of the fixtures. 

From 1 April 2014, a new pooling requirement means that unless the seller has pooled their expenditure in respect of the fixtures within the building, either by allocating the expenditure to a capital allowances pool or by claiming a first year allowance or annual investment allowance, the purchaser will not be able to claim any capital allowances on the amount agreed for the fixtures.

The new provisions do not apply where there has been no previous owner of the fixtures who is entitled to claim capital allowances.  For example, if the property has been bought from the original developer (who would have been trading and could not therefore have incurred capital expenditure), the new rules will not be applicable.  Similarly, if the fixtures were newly acquired and fitted by an exempt person such as a pension fund, the provisions will not apply.  However, the new rules will apply if there has been a “past owner” who is entitled to claim capital allowances, even if it was not that person who sold the building to the current owner. 

Where it applies, the new legislation provides that if a purchaser wishes to claim capital allowances on fixtures in a property:- 

  • The past owner must have allocated its expenditure on the fixtures to a capital allowance pool prior to its sale of the property or must have claimed a first year allowance in respect of its expenditure (the Pooling Requirement); and
  • A s.198 election (an election in accordance with Section 198 of the Capital Allowances Act 2001) must be entered into within two years of the buyer’s acquisition of the interest in the property or, on application of either the buyer or the seller within two years of the buyer’s acquisition of the interest in the property, the First Tier Tribunal must determine an amount of the purchase price to be apportioned to the fixtures (“the Fixed Value Requirement”).

Practical effect for purchasers

The changes make both the pooling of capital expenditure and s.198 elections mandatory if purchasers wish to claim capital allowances.

Problems may arise for purchasers of properties after April 2014 if the seller was entitled to claim capital allowances but chose not to and did not therefore pool its capital expenditure.  In these circumstances, it will be necessary for the purchaser to negotiate with the seller to require it to pool its expenditure prior to sale.  If the seller is not willing to do so, the buyer is likely to want to renegotiate the purchase price payable.

Situation where persons unable to claim capital allowances

The new legislation provides that if a person purchases a property from a person who cannot claim capital allowances such as a pension fund, the Pooling Requirement and Fixed Value Requirement must still be met if a previous owner was entitled to claim capital allowances.

The previous owner that was entitled to claim capital allowances must have met the Pooling Requirement and it, and the person to whom it sold the building, must have entered into a s.198 Election in order to meet the Fixed Value Requirements.   Failure to have done this will mean that any later purchasers will not be able to claim capital allowances.  This may affect the purchase price that the seller can achieve for the property.


It is essential for a purchaser to enter into a s.198 election when buying a property if it wishes to claim capital allowances. 

The new legislation will result in additional due diligence being undertaken by purchasers to ensure that the Pooling Requirement is satisfied.   Purchasers may wish to include in the sale contract either a warranty that the seller has pooled its capital expenditure or an undertaking that it will do so prior to completion of the transfer of the property.

The new legislation is likely to cause difficulties for purchasers of properties from pension funds and charities as the pension fund or charity is unlikely to have entered into a s.198 election when it bought the property and this will prevent its purchaser from claiming capital allowances.   If the pension fund or charity acquired the property from another pension fund or charity, the new purchaser will need to trace back the ownership in order to determine whether a s.198 election had been entered into on any of the previous transfers.   This may be difficult or in some cases impossible.






Clarkslegal, specialist Real Estate lawyers in London, Reading and throughout the Thames Valley.
For further information about this or any other Real Estate matter please contact Clarkslegal's real estate team by email at by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.
This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.

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