Capital Allowances on Property Acquisitions: The Importance of Section 198 Elections
Why Elections Matter
Under Section 198 of the Capital Allowances Act 2001, when a commercial property containing qualifying fixtures is sold, both the buyer and seller must agree, via a written election, on the value of fixtures being transferred for capital allowances purposes.
This election is not a formality; it is the legal mechanism that determines who retains entitlement to claim future allowances. Without it, the buyer may be permanently barred from claiming allowances on those fixtures, regardless of cost or use.
The Two-Year Rule
An election must be made within two years of completion and filed jointly by both parties. If no election is submitted, or if the seller had already pooled the expenditure and claimed allowances but no value is agreed, the entitlement is lost. The only alternative is to apply to the First-tier Tribunal (Tax) for a determination, a process that is both time-consuming and uncertain.
Due Diligence and Valuation Challenges
For corporate acquisitions or portfolio transactions, verifying the existence and status of prior elections is essential.
Common issues include:
Sellers who cannot produce prior Section 198 agreements;
Ambiguous allocations of fixtures within sale contracts;
Double-counting or omission of pooled expenditure; and
Legacy properties with incomplete fixed asset records.
Specialist valuation and legal coordination are often required to reconcile contract documentation with tax records and construction data.
Strategic Considerations for Buyers and Sellers
For sellers, agreeing an appropriate election value prevents inadvertent clawback or HMRC enquiry into historical claims. For buyers, negotiating a realistic transfer value ensures entitlement is preserved — particularly where significant embedded fixtures (electrical, mechanical or sanitary installations) exist.
A common error is agreeing a nil election to expedite completion, effectively forfeiting entitlement worth hundreds of thousands of pounds in potential allowances.
Why Elections Are Increasingly Critical
As HMRC scrutiny on capital allowances claims has intensified, the presence, or absence, of Section 198 documentation is often one of the first points of enquiry in any compliance check. Failure to maintain a defensible record not only jeopardises entitlement but can also affect deferred tax accounting and valuation accuracy in audited financial statements.
The Technical Summary
Section 198 elections are more than a procedural requirement; they are a cornerstone of defensible capital allowances entitlement. Accurate elections require coordination between tax, legal and property teams, and should be approached as part of a structured due diligence process, not an afterthought at completion.