Capital allowances - Elections

The issue of capital allowances elections is not always straightforward and errors can sometimes prove costly.  The purpose of this guide is to set out, for each type of election, the key points of practice and potential problem areas.

There are, today, three main situations where a capital allowances election may be considered:

  • Where the lessor elects to transfer entitlement to allowances on plant and machinery fixtures – CAA 2001, section 183.
  • On the sale of a property where the buyer and seller agree to apportion the sale price to fix the value of the plant and machinery fixtures where the seller has previously made a claim– CAA 2001, section 198.
  • On the grant of a new lease of over 50 years on a property where the lessor and lessee enter an election under CAA 2001, section 183 and also agree to apportion part of the premium paid as being towards any plant and machinery fixtures in the property on which the lessor has previously made a claim– CAA 2001, section 199.

In each case it is important that the correct procedures and time limits are adhered to in order for the election to be valid.


From April 2012 where the seller has claimed capital allowances on any plant fixtures in a property being sold, then the parties must comply with the “fixed value requirement”.

Essentially, this fixed value requirement makes it mandatory for the parties to enter into an election under either section 198 or 199, as appropriate, in order for the buyer or lessee to be entitled to claim Capital Allowances on any of the fixtures within the property.

Whilst failure by the parties to enter an election will deny allowances to the buyer or lessee, the seller or lessor will still be exposed to a potential claw-back of any previously claimed allowances.

An election under this section is needed if a building is constructed on, for example, a freehold interest and an inferior interest is subsequently granted for a capital sum that in whole or in part is for the provision of plant and machinery fixtures.

As part of any agreement the tax rates of the two parties should always be considered. This is because it may be advantageous to leave the allowances with the party with the highest tax rate, meaning the benefits of doing this can be shared.

In practice, when a property has been acquired, it is always worth checking that the seller has actually pooled their qualifying expenditure and, if they have, to check it covers all the items of plant and machinery within the property. It is not unusual for someone to claim on refurbishment expenditure but not claim when they actually purchased the building.

For purchases after April 2104 it is imperative that a seller has pooled all of their qualifying expenditure on every item of plant and machinery they are entitled to claim on. If they have not then the buyer, and any future owner, will be unable to make a claim on these items.

Where a section 198 election has been agreed, the buyer should always check to establish if there are any items of plant that the seller was not entitled to claim on which would have been excluded from the election. This may enable the buyer to make an additional overage claim.

For example, following changes that came into effect from 1st April 2008, if the seller acquired the property before that date then they would not have been entitled to make a claim on any items that have only qualified since that time. This would include:

  • General electrical power and lighting installations.
  • Cold water systems.
  • External solar shading, such as Brise Soleil.

As any additional claim for these items will be based on an apportionment of the purchase price, it is important that expert advice is sought to ensure a valid claim at the highest value.

A section 199 election is only relevant on the grant of a new long lease for a premium where the parties also enter into a section 183 election to transfer entitlement to the allowances from the lessor to the lessee.

A section 183 election is only needed if the lessor is entitled to an allowance or would be if they were within the charge to tax.

It is not needed where a property is bought from a developer on a long lease, providing the provisions of section 184 apply (i.e. the lessor could not claim because they are a trader and the building has not been used for a qualifying activity).

Finally, a section 183 election must be made by notice to HMRC within two years of the date of the lease in order for entitlement to pass to the lessee.

In theory, a section 198 election should be a straightforward process; in practice, however, it seems to cause a degree of confusion which can lead to a loss of tax allowances, usually for a purchaser.

A section 198 election is an agreement between the buyer and seller on the proportion of the sale price that should be attributed to the plant and machinery fixtures.

The key points are:

·            A section 198 election only applies if the seller is required to bring into account a disposal value for the plant and machinery fixtures.  This is only required if the plant and machinery has been pooled by a seller.  Consequently, if the expenditure has not been pooled by the seller then a section 198 election cannot be made.

  • The elected amount cannot exceed the lower of the amount pooled by the seller or the actual sale price.
  • An election must be made by notice to HMRC within two years of the date of completion of the sale of the qualifying interest.
  • The election must state the elected amount, the names of the parties to the election, information to identify the plant and machinery (ideally a list), details of the property, the interest acquired and the unique tax reference (UTR) of each party to the election. If either party does not have a UTR then the election must state that.

A seller may want to include a low value such as £1 but the purchaser does not have to accept this and any final agreed value is a matter for negotiation. Additionally, if the parties are unable to agree then there is always the option of referring the matter to the First Tier Tribunal.

Once this election to transfer the right to claim allowances is in place then the rules and issues relating to a section 199 are exactly the same as the rules and issues relating to a section 198 election which have already been set out above.

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