Commercial property tax relief can be won or lost in a single paragraph.
It might look like routine legal wording, but a Section 198 election can decide whether a buyer claims valuable capital allowances or walks away with nothing.
For some investors, that small clause can mean tens of thousands of pounds. For larger commercial properties, it can mean much more.
(Reading Time: Approx. 5 minutes)
Topics Discussed:
- How capital allowances can apply when buying or selling commercial property.
- Why Section 198 elections must be handled properly before completion.
Commercial property and hidden tax relief
When you buy a commercial property, you are not just buying bricks, walls and land.
You may also be buying fixtures and integral features that are part of the building. These can include heating systems, radiators, air conditioning, electrical systems, lighting, alarms, cabling, lifts, hot and cold-water systems, blinds and other fitted items used within the business premises.
These items may qualify for capital allowances.
In simple terms, capital allowances allow businesses to deduct qualifying expenditure from taxable profits, replacing ordinary accounting depreciation which is generally not allowable for tax.
HMRC confirms that capital allowances can apply to plant and machinery kept for business use, including fixtures in many cases.
This is why the tax position on a property purchase should never be left until after the deal has completed. By then, the damage may already have been done.
What can qualify for Capital Allowances
Commercial properties often contain significant qualifying assets.
The value is rarely obvious from the headline purchase price because the contract normally shows one total figure for the property.
Within that total figure there may be a substantial amount relating to qualifying fixtures.
For example, a £4.5 million commercial property purchase may contain over £1 million of qualifying allowances if the building has significant plant, machinery and integral features.
That does not mean every property will produce a claim of that size, but it does show why the issue needs to be checked carefully.
The Annual Investment Allowance is currently £1 million, giving 100% relief on qualifying plant and machinery expenditure up to that limit, subject to the detailed rules and the circumstances of the business.
Where expenditure does not receive full relief immediately, it may still attract writing down allowances through the appropriate pool.
HMRC’s current guidance states that the main pool rate is 14% from April 2026, having previously been 18%, while the special rate pool remains at 6%.
There may also be Structures and Buildings Allowance for qualifying construction or renovation costs on non-residential buildings.
This is different from plant and machinery allowances, and is generally claimed at 3% per year over 33 and one third years.
Why Section 198 elections matter
A Section 198 election is a joint election between the buyer and seller.
It fixes the amount of the sale price that is treated as relating to qualifying fixtures. This amount then becomes important for both sides.
For the seller, it fixes the disposal value brought into account.
For the buyer, it fixes the qualifying expenditure they may be able to claim.
HMRC’s manual confirms that the election fixes both the seller’s disposal value and the purchaser’s qualifying expenditure. This is where problems arise.
If the election is prepared incorrectly, or if the value is fixed at £1 in the seller’s favour, the buyer may be left with almost no claim. In some cases, they may be left with no capital allowances at all.
The consequences can be permanent. There are also strict requirements around pooling and fixed value.
The seller must have pooled the relevant expenditure in a chargeable period where they were treated as owning the fixture, although HMRC confirms that the seller does not necessarily have to have claimed writing down allowances.
A valid election must be made in writing to HMRC and must contain the required information. HMRC guidance also sets out the election procedure under the relevant Capital Allowances Act provisions.
Why buyers and sellers both need advice
A buyer normally wants the highest possible qualifying value because that can increase future tax relief.
A seller may want the opposite. If the seller has already claimed allowances, they may want to limit any balancing adjustment or preserve their own tax position.
That means the clause should be negotiated, not ignored.
This is not just an accounting issue. It is a legal and tax issue that should be dealt with before exchange and completion.
Solicitors may draft the contract, but capital allowances specialists should check the tax effect of the wording.
We have seen cases where a buyer thought they were acquiring a valuable commercial property with significant tax relief available, only to find that the election had been completed in a way that gave them nothing.
Once the deal is done and the paperwork is signed, there may be no easy route back.
Historical purchases can still hold value
If you bought a commercial property in the past and never considered capital allowances, there may still be a claim available.
This depends on the purchase history, the tax position of previous owners, whether the fixtures were pooled, whether any elections were made, and how the property has been used.
This is why a review can be valuable even where the purchase happened years ago.
Many property investors assume that if their accountant has not claimed capital allowances already, nothing can be done. This is not always correct.
Commercial property claims often require a specialist survey and a detailed review of the legal documents, tax history and qualifying fixtures.
The key point is simple. Do not assume there is no claim until the position has been properly checked.
Summary
Commercial property capital allowances can be extremely valuable, but they can also be lost through poor wording, missed elections or a lack of specialist advice.
A small paragraph in the purchase contract can decide whether the buyer receives meaningful tax relief or whether those allowances are reduced to £1, or worse, lost altogether.
Sellers also need advice because the same election can affect how they are taxed on disposal.
Before you complete on a commercial property transaction, whether buying or selling, speak to us at Tax Expert.
We can review the position, check whether qualifying allowances exist, and help ensure the deal is structured in your favour.
Fill out our form here for any questions, email us at info@taxexpert.co.uk, or message us on our WhatsApp for out of office hours.
Kind regards,
Ilyas Patel
