Capital Allowances for Property Investors: Fixtures, Integral Features, and Section 198 Elections

Capital allowances are frequently overlooked by commercial property investors, yet they can represent one of the most valuable tax reliefs available. A commercial property with significant M&E (mechanical and electrical) installations may have 20–40% of its purchase price attributable to qualifying plant and machinery — generating tax deductions that accelerate against the investor's rental or trading income. This guide explains how the rules work, how to protect your allowances on property acquisition, and the current position for residential property investors following the abolition of Furnished Holiday Letting status in 2025.

The Fundamental Distinction: Buildings vs Plant and Machinery

UK tax law does not permit a deduction for the cost of a building. Structures and Buildings Allowance (SBA) provides 3% per annum straight-line relief on qualifying construction costs, but this is available only on new construction or conversions, not on the purchase of an existing property.

Plant and machinery, however, can qualify for the Annual Investment Allowance (100% deduction) or writing-down allowances (18% main pool or 6% special rate pool). The key challenge with commercial property is identifying and valuing the qualifying plant and machinery embedded within a building.

Integral Features

The most valuable category for commercial property investors is integral features (Capital Allowances Act 2001, s.33A). These are assets that are physically part of a building but qualify for capital allowances as if they were separate assets. Integral features include:

• Electrical systems, including wiring, distribution boards, lighting (including emergency lighting), and power supplies.
• Cold water systems: pipework, tanks, and pumps for cold water.
• Space and water heating systems: boilers, heat pumps, underfloor heating, radiators, and hot water cylinders.
• Powered systems of ventilation: air handling units, fan coil units, mechanical ventilation.
• Lifts, escalators, and moving walkways.
• External solar shading.

Integral features are allocated to the special rate pool at a writing-down rate of 6% per annum (reducing balance). However, they also qualify for the Annual Investment Allowance, allowing 100% deduction in the year of expenditure — a significant acceleration compared with the 6% pool.

For a property investor buying a commercial property, the historical capital allowance position matters greatly. The seller's historic expenditure on integral features determines how much allowance value can be transferred to the buyer.

Fixtures (Embedded Plant)

In addition to integral features, commercial properties often contain fixtures — plant and machinery that is permanently attached to a building but not classified as an integral feature. Examples include:

• Kitchen fitments in a commercial kitchen.
• Air conditioning units (where not part of the central system).
• Bathroom sanitaryware in commercial properties.
• Carpets and floor coverings (where qualifying plant — e.g., in a hotel).
• Data cabling and structured cabling systems.
• Partitioning (demountable partitioning often qualifies; fixed partitioning generally does not).
• Fire alarm and suppression systems.

Fixtures enter the main pool at a writing-down rate of 18% per annum or may qualify for AIA. Unlike integral features (which go to the special rate pool), fixtures are somewhat more generous in their standard writing-down rate.

The Section 198 Election: Critical on Property Purchase

When a commercial property is bought and sold, the capital allowance history of the fixtures and integral features must be formally transferred between buyer and seller. Without this mechanism, the allowances are lost — neither party can claim them.

A s.198 election (Capital Allowances Act 2001, s.198) is a joint election made between the seller and buyer that establishes the agreed value of fixtures and integral features within the purchase price. The election:

• Must be made within two years of the date of completion of the property purchase.
• Can allocate any value between £1 (effectively extinguishing the allowances) and the full original cost incurred by the seller. The buyer cannot claim more than the seller's original qualifying expenditure.
• Is made jointly: both buyer and seller must sign.

Why would a seller agree to a higher value? Where the seller has already claimed full allowances through the AIA, allocating a higher value to the fixtures in the s.198 election produces a balancing charge for the seller — taxable income. Sellers therefore prefer to agree a low value. Buyers prefer a high value to maximise the allowances they can claim.

Why would a seller agree to a lower value? Sometimes the seller's advisers overlook or undervalue the fixture allowances, leaving money on the table. Buyers should commission a capital allowances survey before completion to identify and quantify qualifying plant, and then negotiate the s.198 election value with clear evidence.

Deemed election at £1: Where no s.198 election is made and no "pooling requirement" applies, certain fixtures may be deemed to have been transferred at £1, eliminating the buyer's ability to claim allowances. Since 2014, a pooling requirement applies: if the seller never pooled the allowances (i.e., never claimed them), the buyer cannot claim them either, unless a further election ("the fixed value requirement") is made. This has become a technical minefield. Buyers of commercial property should always commission capital allowances advice before exchange of contracts.

Land Remediation Relief

Land remediation relief provides an enhanced deduction for costs incurred by UK companies in remediating land (and buildings) from contamination caused by a third party's industrial activity. The deduction is 150% of qualifying remediation expenditure — i.e., a deduction 50% greater than the cost incurred.

Where the company is loss-making, the surrenderable loss may be exchanged for a cash credit at a rate of 16% of the surrendered loss — equivalent to a cash return of around 24% of the qualifying remediation expenditure (16% × 150%). This makes land remediation relief particularly valuable for developers acquiring contaminated brownfield sites.

Qualifying contamination includes: asbestos, chemical contamination from industrial processes, heavy metals, Japanese knotweed, buried foundations or buildings. The contamination must have been caused by someone other than the claimant or its predecessor — an owner who themselves contaminated the land cannot claim.

EPC Upgrades and Energy-Efficient Plant

Expenditure on improving the energy performance of a commercial property — replacing inefficient systems with energy-efficient alternatives — may qualify for capital allowances in the ordinary way (as integral features or fixtures). There is no specific enhanced rate for EPC-related expenditure in commercial property (the 100% Enhanced Capital Allowances for energy-efficient plant were withdrawn from April 2020), but the AIA still provides 100% first-year relief where the expenditure qualifies.

For landlords required to meet minimum EPC standards, capital allowances on qualifying improvements can partially offset the cost of compliance.

Residential Property: The Current Position

Furnished Holiday Lettings (FHL) — Abolished from April 2025

Until 5 April 2025, properties qualifying as Furnished Holiday Lettings were treated as trading income for tax purposes, giving FHL landlords access to capital allowances on furnishings and equipment, BADR on eventual sale, and pension contribution eligibility.

From 6 April 2025, the FHL regime was abolished (announced at Spring Budget 2024 and legislated in Finance Act 2025). FHL properties are now treated as ordinary residential lettings. Capital allowances on furniture and equipment in residential letting properties are generally not available. Instead, a replacement of domestic items relief allows a deduction for the cost of replacing furniture, furnishings, and domestic appliances (but not for the initial purchase).

Long-Let Residential Property

Ordinary residential long-let properties have never qualified for capital allowances on plant and machinery within the dwelling. The Structures and Buildings Allowance is not available on existing residential property purchases. Capital allowances are therefore of limited relevance for standard residential investment portfolios.

Commercial Conversion

Where a landlord converts a commercial property to residential use, capital allowances already claimed on the commercial plant and machinery may give rise to balancing charges at the point of conversion. Planning for this transition requires specialist advice.

Buy-to-Let vs Commercial Property: Capital Allowances Summary

Property Type	Capital Allowances Available?
Commercial (offices, retail, industrial)	Yes — integral features + fixtures
Mixed-use (part commercial, part residential)	Yes — on commercial parts
Serviced apartments / apart-hotels	Depends on structure — specialist advice required
Standard residential buy-to-let	No — replacement of domestic items relief only
Former FHL (post April 2025)	No — FHL abolished
HMO (house in multiple occupation)	Generally no, unless commercial elements present

Compliance Caveat

Capital allowances for property are a complex specialist area, involving the interaction of the Capital Allowances Act 2001, SDLT, and income/corporation tax legislation. HMRC regularly challenges the categorisation of expenditure, the application of the pooling and fixed value requirements, and the validity of s.198 elections. The FHL abolition from April 2025 is a significant change for many investors with holiday property portfolios. This guide reflects the law as at June 2026. Buyers of commercial property should commission a capital allowances survey from a specialist before exchange of contracts, and negotiate s.198 elections with reference to a professional valuation. Tax rules and rates are subject to change; professional advice is essential.

How Global Investments Can Help

Global Investments advises property investors — from individual commercial landlords to institutional-grade portfolios — on maximising the tax efficiency of property acquisitions, refurbishments, and disposals. We work with specialist capital allowances surveyors to identify qualifying plant and machinery in commercial properties, advise on s.198 election negotiations, and integrate capital allowances planning into the broader tax and investment strategy. For international property investors and internationally mobile clients with UK property portfolios, we also advise on the interaction of UK capital allowances with overseas tax positions. Contact us to discuss your property portfolio.