Capital Allowances and Capital Gains Tax: A Guide for Property Investors
May 19, 2025
When you invest in property, understanding how tax works can make a big difference to your returns. One area that often causes confusion is what happens when you sell a property, and you’ve claimed capital allowances on it. Many people worry that those tax savings will be “taken back” when they sell – but that’s not quite how it works.
This article clears up that misconception and explain how capital allowances really affect Capital Gains Tax (CGT).
A Common Misunderstanding
It’s not unusual for property investors (and sometimes even their advisers) to think that if they claim capital allowances on things like fixtures and equipment, they’ll end up paying for it later when they sell the property – essentially wiping out the benefit.
Let’s walk through an example to see why that’s not the case.
Example 1: The Care Home Sale
Imagine someone buys a care home for £2 million. The price breaks down like this:
- Property: £1.5 million
- Furniture & Equipment: £100,000
- Goodwill: £400,000
A specialist review determines that £300,000 of the £1.5 million property value is fixed plant and machinery (fixtures that qualify for capital allowances). These allowances are claimed, in addition to the £100,000 for furniture.
Later, the care home is sold for £2.5 million. People often think that since the Balance Sheet now shows £1.2 million under “Land & Buildings” (with £300,000 under “Plant & Machinery”), the CGT gain is now £1.3 million – rather than £1 million – due to the “reclassified” costs. This leads to the belief that the capital allowances were simply a cash flow exercise.
But here’s the truth: That’s not how CGT works.
The Correct Tax Treatment
Capital Gains Tax is calculated under a rule that treats the property as one single asset. It doesn’t matter how the costs are split in your accounts. So, when you sell a property, the full original cost is used to calculate the gain – including any fixtures you claimed allowances on.
So, in the care home example:
- Bought for £1.5 million
- Sold for £2.5 million
- Gain = £1 million
Even though capital allowances were claimed, they don’t affect the CGT calculation when selling at a profit.
In fact, with the right agreement between buyer and seller, the part of the property that had capital allowances can be given a disposal value of just £2. This lets the seller keep almost all the allowances without it affecting the CGT bill.
What If the Property Is Sold at a Loss?
If the property is sold for less than it was bought for, things are a bit different.
Let’s say the care home is sold for £1.1 million – a loss of £400,000 compared to the original £1.5 million. In this case, the loss is reduced by the capital allowances previously claimed (e.g., £299,998). So, the final capital loss for tax purposes would be just over £100,000.
Still, this doesn’t create a gain – it just reduces the size of the loss.
Don’t Let Accounting Confuse Things
Another common mistake is changing how assets are categorised on the Balance Sheet. Some accountants move costs from “Land & Buildings” to “Plant & Machinery” based on capital allowances claimed. But for accounting purposes, the cost of assets that are permanently part of a building should stay allocated under Land & Buildings.
Claiming capital allowances is a tax issue, not something that should change how assets are recorded in your financial statements.
What About Structures and Buildings Allowances (SBAs)?
So far, we’ve mostly talked about Plant and Machinery Allowances (PMAs). But there’s another type of tax relief for commercial buildings: Structures and Buildings Allowances (SBAs).
Unlike PMAs, SBAs do affect your Capital Gains Tax when you sell. Any SBAs you’ve claimed are added to the disposal proceeds when calculating CGT, which increases the taxable gain.
Example 2: The Hotel Development
You buy land for £300,000 and build a hotel for £1.7 million.
A specialist review shows:
- PMAs: £600,000
- SBAs: £1 million
- Non-qualifying costs: £400,000 (incl. land)
Five years later, you sell the hotel for £3.5 million. You’ve claimed £150,000 in SBAs (at 3% per year) over five years.
When working out your CGT, that £150,000 is deducted from your build cost, increasing your gain. But even with that, SBAs still offer helpful tax relief during the years you own the property – they can lower your taxable profits and boost your cash flow.
Also note: Unlike PMAs, you can’t keep unclaimed SBAs when you sell – they have to be passed on to the buyer, along with an Allowance Statement providing the necessary details.
In Short:
- Capital allowances (PMAs) don’t increase your CGT bill and don’t require changes to your accounts.
- Structures and Buildings Allowances (SBAs) do affect CGT but still offer long-term benefits.
- With good planning, these allowances can lead to real, lasting tax savings.
Next Steps?
If you think you or your client could benefit from reviewing your property investments for unclaimed tax reliefs, we’re here to help! Our team at Bonham & Brook has over 20 years of combined experience in capital allowances and can guide you through every step.
Give us a call on 020 3523 9125 or email manthistle@bonhamandbrook.co.uk to get started.
Mark Anthistle
Capital Allowances Manager
Book a Meeting with Mark here
