Businesses investing in assets may be able to reduce their taxable profits by claiming capital allowances on qualifying expenditure. The availability and extent of relief depend on several factors, including the nature of the expenditure, how the asset is used within the business, whether the cost is capital in nature and which capital allowances provisions apply.
This guide provides an overview of how capital allowances operate for UK businesses, covering eligibility, the types of expenditure that may qualify, the importance of accurate asset classification, how claims are calculated and the circumstances in which a specialist review may help identify additional tax relief opportunities.
What are capital allowances?
Capital allowances are a form of UK tax relief that allows businesses to deduct some or all of their qualifying capital expenditure from taxable profits. In practical terms, they provide a mechanism for obtaining tax relief on eligible capital investments, including machinery, equipment, fixtures and other business assets.
Capital allowances are distinct from accounting depreciation. Depreciation reflects the reduction in an asset's value over its useful economic life and is recognised when calculating a business's accounting profits. However, depreciation is not generally an allowable deduction for tax purposes and must therefore be added back when calculating taxable profits.
Instead, capital allowances operate under a separate set of tax rules, which determine whether expenditure qualifies for relief, how the relevant assets should be classified and when the associated tax deduction can be claimed.
This distinction is important because purchasing an asset and recording it within a business's fixed asset register does not automatically establish its eligibility for capital allowances. A separate assessment may be required to identify and quantify the available tax relief.
Who is eligible for capital allowances?
Most UK business structures can benefit from capital allowances, including companies, sole traders and partnerships, provided they incur qualifying expenditure on assets used for business purposes.
Non-taxpaying organisations including charities, local councils, and pension funds, as well as businesses which treat assets as trading stock, e.g. property developers, cannot benefit from capital allowances.
Generally, the asset must be owned by, or treated as belonging to, the business, be used for qualifying business purposes and satisfy the relevant conditions under the capital allowances legislation.
The availability of relief will depend on the nature of the expenditure, the asset itself, how it is used and its relationship with the business's qualifying activities. For example, machinery used in the day-to-day operation of a trade may qualify, whereas an asset acquired for personal use or expenditure unrelated to the business will not ordinarily be eligible.
What are the main types of capital allowances?
Expenditure may qualify for capital allowances where it relates to assets used within a business and satisfies the relevant legislative requirements.
The three principal categories of capital allowances are:
- Plant and Machinery Allowances (PMAs)
- Structures and Buildings Allowances (SBAs)
- Research and Development Allowances (RDAs)
Plant and Machinery Allowances
Plant and Machinery Allowances (PMAs) represent the most common form of capital allowances claimed by businesses. They apply to qualifying plant and machinery expenditure incurred on assets used in the operation of a business.
Qualifying assets include furniture, equipment and machinery, as well as certain motor vehicles. Importantly, the provisions also extend to fixtures incorporated within commercial properties.
For capital allowances purposes, fixtures are defined as plant or machinery installed or otherwise fixed in or to a building, or other description of land, in such a way that they become part of that building or land as a matter of law.
Common examples of qualifying fixtures include:
- Electrical and lighting installations*
- Heating, ventilation and air-conditioning systems (HVAC)*
- Lifts and escalators*
- Hot and cold-water installations*
- Solar panels and electric vehicle (EV) charging points
- Fire protection and sprinkler systems
- Security and CCTV systems
- IT and data installations
- Sanitary and kitchen installations
- Fitted furniture and carpets
*Certain installations, including electrical systems, heating and water installations, are collectively classified as integral features and fall within the Special Rate expenditure category.
Structures & Buildings Allowances
Introduced in 2018, Structures and Buildings Allowances (SBAs) provide tax relief on qualifying expenditure incurred in constructing or acquiring new structures and buildings used for qualifying business purposes.
Examples of structures and buildings that may qualify include:
- Roads and constructed hard surfaces
- Tunnels and bridges
- Walls and fences
- Aqueducts and dams
- Embankments
- Permanent terracing and seating areas at sports grounds
- Hard tennis courts and artificially constructed features of golf courses, such as bunkers
It is important to distinguish between expenditure qualifying for PMAs and SBAs. Expenditure on plant and machinery fixtures cannot also qualify for SBAs. Accordingly, qualifying fixtures must first be identified and excluded from the expenditure being considered for an SBA claim to ensure that the relevant tax relief is correctly allocated.
Research & Development Allowances
Certain projects involve the construction or provision of facilities specifically intended for Research and Development (R&D) activities.
Research and Development Allowances (RDAs) provide tax relief on qualifying capital expenditure incurred by a trader in providing facilities for R&D purposes.
To qualify, the R&D activities must be related to the trade carried on by the business. The relevant expenditure and intended use of the facilities must therefore be assessed against the applicable legislative requirements.
Which costs usually sit outside a capital allowances claim?
Not all expenditure associated with a business or property investment will qualify for capital allowances. Common examples of expenditure that is generally excluded include:
- The acquisition of land
- Residential property and structures situated within the grounds of a residence
- Planning permission
- Financing costs, including loan interest
- Public enquiry costs and certain legal expenses
- Landscaping and land reclamation
- Expenditure met by grants or other contributions, where the relevant restrictions apply
RDAs are subject to additional restrictions and are available to traders rather than individuals carrying on a profession or vocation.
Assets used for business entertainment and leased assets may also require separate consideration, as their eligibility depends on the specific circumstances and applicable legislative provisions.
It is also important to distinguish between capital and revenue expenditure. Costs treated as repairs or other revenue expenditure cannot also be claimed as capital allowances.
What type of project warrants a capital allowances review?
A capital allowances review should be considered whenever a business undertakes significant expenditure in connection with a commercial property or business asset.
Typical projects that may present opportunities to claim capital allowances include:
- Commercial property acquisitions
- New-build construction projects
- Extensions to existing buildings
- Property renovations and refurbishments
- Commercial fitouts
The extent of the available relief will depend on the nature of the project, the assets involved and the associated expenditure. In many cases, a specialist review can identify qualifying expenditure that may not have been recognised through the normal accounting and tax return preparation process.
How are capital allowances claimed?
Once the qualifying expenditure has been identified and quantified, the next step is to determine the most tax-efficient approach to securing the available relief. The following section outlines the principal capital allowances available to businesses and the circumstances in which each may be applicable.
Annual Investment Allowance
The Annual Investment Allowance (AIA) provides 100% tax relief on qualifying plant and machinery expenditure, up to the annual limit of £1 million.
This means that a business can generally deduct the full cost of qualifying assets from its taxable profits in the accounting period in which the expenditure is incurred.
However, certain assets, including business cars, are excluded from AIA and are subject to separate capital allowances treatment.
Where expenditure exceeds the available AIA limit, or where a business operates within a group structure or has a shorter accounting period, additional tax planning may be required to maximise the available relief.
Full Expensing
Full Expensing is an uncapped 100% First-Year Allowance (FYA) available to companies within the charge to Corporation Tax.
It applies to qualifying Main Rate plant and machinery expenditure incurred on or after 1 April 2023, provided the assets are new and unused.
This allows eligible companies to deduct the full cost of qualifying expenditure from their taxable profits in the accounting period in which the expenditure is incurred.
Special Rate Allowance
The Special Rate Allowance (SR Allowance) provides an uncapped 50% first-year deduction for qualifying Special Rate plant and machinery expenditure incurred by companies within the charge to Corporation Tax.
It applies to qualifying new and unused assets acquired on or after 1 April 2021.
The remaining 50% of the expenditure is allocated to the Special Rate Pool and subsequently attracts Writing Down Allowances at the applicable rate.
50% Main Rate First-Year Allowance
Originally introduced in the Autumn Budget 2025 at a rate of 40%, the Main Rate First-Year Allowance was increased to 50% in the Autumn Budget 2026.
The revised rate applies to qualifying Main Rate plant and machinery expenditure incurred on or after 1 January 2027, subject to the relevant conditions, and is available to both Income Taxpayers and Corporation Taxpayers.
This allowance enables businesses to deduct 50% of qualifying expenditure from their taxable profits in the accounting period in which the expenditure is incurred. The remaining balance is subsequently allocated to the Main Rate Pool and relieved through the standard Writing Down Allowance provisions.
Writing Down Allowances
Qualifying plant and machinery expenditure that does not benefit from AIA or an applicable First-Year Allowance must generally be allocated to the relevant capital allowances pool.
Writing Down Allowances (WDAs) provide tax relief by reducing the remaining balance of these pools over successive accounting periods.
The applicable rates depend on the classification of the expenditure:
- Main Rate Pool: A WDA of 14% from April 2026, reducing to 12% from April 2027 following the announcement in the Autumn Budget 2026.
- Special Rate Pool: A WDA of 6%, applicable to expenditure including integral features, solar panels and long-life assets.
The classification of expenditure is therefore particularly important, as the applicable allowance rate will influence how quickly a business can obtain tax relief.
When and how can capital allowances be claimed?
Capital allowances are claimed through the relevant business tax return.
The reporting requirements depend on the business structure:
- Companies claim through their Company Tax Return
- Sole traders claim through their Self-Assessment Income Tax Return
- Partnerships generally include the claim within their Partnership Tax Return, with the resulting tax relief reflected in the individual partners' tax positions
Accelerated relief through AIA, First-Year Allowances and Full Expensing must be claimed in the relevant accounting period in which the expenditure is incurred.
It is therefore important that qualifying expenditure is identified and assessed promptly. Where these allowances are not claimed in the appropriate period, the opportunity to obtain accelerated relief may be lost, potentially leaving the expenditure to be relieved through the relevant capital allowances pools over a longer period.
When should a business review its capital allowances position?
Accountants and tax advisers will typically consider capital allowances on everyday business assets, such as furniture, machinery and equipment, as part of the annual accounts and tax computation process.
However, significant property-related expenditure, particularly acquisitions, construction projects and major improvements, often requires a more detailed specialist assessment to ensure that all available tax relief is identified and appropriately claimed.
For businesses that have undertaken construction or renovation projects in previous years, a retrospective review of historical expenditure may also be worthwhile. Depending on the circumstances, qualifying expenditure may still be eligible for relief in subsequent accounting periods, provided the relevant conditions are satisfied and the assets remain in place and in qualifying use.
Opportunities to claim capital allowances following the acquisition of existing commercial properties (as opposed to new properties acquired directly from a developer) have become increasingly subject to specific statutory requirements and restrictions.
It is therefore advisable to seek specialist capital allowances advice at an early stage, ideally before exchanging contracts on a property acquisition, to help safeguard the opportunity to claim available relief.
How Bonham & Brook can help with capital allowances
The capital allowances landscape is continually evolving, with changes to legislation and HMRC guidance influencing the availability and treatment of tax relief.
At Bonham & Brook, our specialist capital allowances team provides a comprehensive service designed to identify qualifying expenditure, maximise available tax relief and ensure that all claims are robust, fully substantiated and compliant with the relevant legislation.
Our process begins with a detailed review of the property's tax history and the business's entitlement to claim. This includes assessing previous property acquisitions, alongside any ongoing or completed construction, renovation and refurbishment projects.
Where necessary, we undertake detailed on-site inspections to identify qualifying plant and machinery, establish the nature of the relevant installations and gather the supporting information required to substantiate the claim. This is complemented by a comprehensive assessment of the associated project costs and the preparation of the necessary capital allowances calculations.
The findings are presented in a concise, tailored Valuation Report, setting out the qualifying expenditure, supporting rationale and resulting tax relief opportunities. Our reports are prepared with the needs of the business, its accountants and HMRC in mind, providing a clear audit trail and supporting documentation to demonstrate the basis of the claim.
Our involvement does not end with the delivery of the report. We work alongside your existing accountants and tax advisers, providing ongoing support, responding to queries and assisting throughout the claims process.
At Bonham & Brook, our objective is not simply to identify tax savings, but to provide businesses with the specialist knowledge, technical assurance and ongoing support needed to make the most of the capital allowances available to them.
Our job does not stop once we have issued our report, and your accountant has submitted your claim. At Bonham & Brook, we function as an extension to your existing tax advisory service by offering individual after care, answering any queries you may have regarding your claim and providing all the support you require.