Capital Allowances on Second-Hand Commercial Property: The Fixed Value Requirement and Section 198 Election

Buy an office, warehouse or retail unit and there's usually a genuine capital allowances claim sitting inside it — the heating system, the electrics, the lifts, the sanitary fittings. Miss the paperwork deadline on the way through, though, and that claim doesn't just get harder. It disappears completely, for you and for whoever buys the building after you.

The claim is on the fixtures, not the building itself

A commercial building's structure — the walls, roof and foundations — only ever attracts the Structures and Buildings Allowance, a flat 3% annual writing-down allowance with its own separate rules (we've covered that ground in our article on capital allowances on commercial property). What sits inside the building is a different regime entirely. Plant and machinery allowances under CAA 2001 Part 2 apply to fixtures — items fixed to the building that the tax rules treat as a separate class of asset — and on a typical office or industrial unit that means heating and cooling systems, electrical wiring and lighting, lifts and escalators, sanitary ware, and general alarm and security installations. On a building bought for several million pounds, the fixtures embedded within it can easily represent a meaningful minority of the purchase price, and a correctly evidenced claim can shelter real profit from Corporation Tax or income tax for years.

The catch is that these allowances were never automatically included in the price you paid. Unless someone actively identifies, values and claims them, they simply sit unclaimed inside the building, invisible on both sides of the transaction.

Two conditions, both since April 2014

Before 2014, a buyer of a second-hand commercial building could usually work out a fixtures claim at leisure, sometimes years after completion. Finance Act 2012 closed that down by inserting sections 187A and 187B into CAA 2001, and for any second-hand fixture bought since, a buyer has to satisfy two separate conditions before they can claim anything on it at all.

The pooling requirement under section 187A says the seller (or whoever last owned the fixture and was entitled to claim allowances on it) must have brought the qualifying expenditure into a capital allowances pool before the sale, or within a limited period afterwards. In practice, this means the seller has to have actually claimed, or at least formally recorded, the allowances on their own tax return at some point — not necessarily used them all, but pooled them.

The fixed value requirement under section 187B says the amount of the price attributed to the fixtures has to be fixed, either by a joint election under section 198 CAA 2001 or by an application to the tribunal for a determination, within two years of the sale completing. This is the deadline that catches people out, because it runs from completion regardless of when the buyer's accountant gets around to looking at capital allowances.

The section 198 election: what it actually does

A section 198 election is a joint election, signed by both buyer and seller, that fixes an agreed value for the fixtures included in the sale — separate from, and usually far below, the headline purchase price for the whole property. That fixed figure becomes the buyer's qualifying expenditure for capital allowances purposes, capped at whatever the seller's own unclaimed pooled expenditure was (a buyer can never inherit a bigger allowances pool than the seller actually had).

The practical difficulty is that the seller usually has no ongoing financial interest in getting this right once the deal completes. Their incentive to spend time agreeing figures, or to cooperate with a request eighteen months after completion, is close to zero — and if they've since dissolved, emigrated, or simply stopped answering emails, a s198 election becomes impossible to arrange no matter how much the buyer wants one. That's why the election needs to be negotiated as part of the sale and purchase agreement itself, with the capital allowances value agreed and the election signed at or around completion, not left as an afterthought for the buyer's accountant to chase down later.

Where the parties can't agree a figure, or the seller won't engage, an application to the First-tier Tribunal for a determination is the fallback — but it still has to be made within the same two-year window, and it's a slower, more expensive route than simply negotiating the figure into the contract.

Miss the window and it's not just your claim that's gone

This is the part of the rule that surprises most buyers. If the fixed value requirement isn't met within two years — no election, no tribunal application — the legislation treats the qualifying expenditure on those fixtures as nil. Not reduced, not deferred: nil. And because that nil figure attaches to the fixture rather than to the specific transaction, it carries forward to every subsequent owner of the building too. A buyer who inherits a building with a lapsed claim can't fix the previous owner's mistake by doing their own due diligence properly; the right to claim on those fixtures is gone for good, whoever owns the building next.

This is why capital allowances due diligence belongs in the conveyancing process on any commercial property purchase, not in a conversation that happens after completion. A buyer's solicitor and accountant should be asking the seller, before exchange, whether a capital allowances claim exists on the fixtures, whether it's been pooled, and whether the seller is prepared to sign a s198 election at an agreed value as part of the deal.

When the seller was never entitled to claim

Not every seller has allowances to pass on. A property developer or trader holding the building as trading stock, rather than as a fixed asset used in a qualifying activity, was never entitled to plant and machinery allowances on it in the first place, so there's nothing for the pooling requirement to bite on. The same applies to certain tax-exempt sellers, such as some pension funds and charities, who had no need to claim allowances because they don't pay tax on the relevant profits. In these cases the ordinary pooling requirement doesn't operate as a bar in the same way, but working out exactly what a buyer can claim, and evidencing it to HMRC's satisfaction, needs a proper capital allowances survey and specialist advice — it isn't something to assume your way through.

Integral features, general plant, and why full expensing doesn't help here

Not all fixtures attract the same rate. Integral features under section 33A CAA 2001 — cold water systems, electrical systems, space and water heating, air conditioning and ventilation, and lifts, escalators and moving walkways — go into the special rate pool, currently written down at 6% a year on a reducing balance basis. General plant that doesn't meet the integral features definition, such as most sanitary ware, alarm systems and kitchen equipment, goes into the main pool at 18%.

It's worth being clear about what doesn't help on a second-hand purchase. Full expensing, the 100% first-year deduction available to companies since April 2023, and the equivalent 50% first-year allowance for special rate pool expenditure, are both restricted to plant and machinery that is new and unused. Fixtures acquired inside a building someone else has already fitted out are second-hand by definition, however new the building itself might be to the buyer, so neither relief applies to them. The Annual Investment Allowance has no such restriction, though, and remains available against qualifying second-hand fixtures up to the current £1 million annual cap — a cap that has to be shared across a group of companies under common control, which matters for anyone running several SPVs.

What this means in practice

• Raise capital allowances before exchange, not after completion — ask the seller directly whether a claim exists on the fixtures and whether they'll agree a section 198 value.
• Get the election drafted into the sale and purchase agreement — a seller's willingness to cooperate falls sharply once the deal has completed and their solicitors have closed the file.
• Commission a proper capital allowances survey — a specialist survey identifies and values qualifying fixtures far more reliably than an apportionment based on the headline purchase price.
• Diarise the two-year deadline the moment completion happens — it runs from the sale date regardless of when anyone gets round to looking at the tax position.
• Check what the seller actually was, not just what they claimed — a trading or tax-exempt seller changes the analysis and needs a different approach entirely.

Common questions

What is a section 198 election?

A joint election between buyer and seller that fixes how much of the sale price relates to fixtures on which capital allowances can be claimed. Making it (or applying to the tribunal instead) within two years of completion is one of two conditions a buyer must meet before claiming allowances on second-hand fixtures at all.

What happens if I miss the two-year deadline?

The buyer's qualifying expenditure on the fixtures is treated as nil. The loss is permanent and attaches to the fixture itself, so every future owner of the building loses the right to claim on it too, not just the buyer who missed the deadline.

Can I still claim if the seller never made a claim themselves?

Only if the seller could have claimed but simply hadn't yet, and is willing to pool the expenditure so the pooling requirement is satisfied. Where the seller was never entitled to claim at all, the position is different and needs specialist advice to establish what's actually available.

Do second-hand fixtures qualify for full expensing?

No. Full expensing and the 50% special rate first-year allowance are restricted to new and unused plant, so second-hand fixtures never qualify. The Annual Investment Allowance has no such restriction and can usually be claimed instead, subject to the £1 million annual cap.

This article is general information, not personal tax advice, and tax rules change. Your own position depends on facts we cannot see from here — please take advice before acting on anything above.

← All articles