Capital allowances on property spend: why ownership matters

The starting point for any capital allowances claim

Capital allowances offer valuable tax relief by allowing businesses to deduct qualifying capital expenditure from their taxable profits. Yet many land and property owners or investors fail to claim the allowances available to them, often due to misconceptions about eligibility or uncertainty about the value of potential reliefs. 

When dealing with land or property expenditure, determining whether you hold a ‘qualifying interest in land’ is fundamental to securing capital allowances. This concept underpins eligibility when claiming relief on fixtures and certain types of building-related expenditure, and misunderstandings can lead to missed opportunities or invalid claims. 

What is a qualifying interest in land?

A ‘qualifying interest in land’ (sometimes referred to as a ‘relevant interest’) refers to the legal right a person has in the land or property at the time capital expenditure is incurred. This is crucial when claiming capital allowances on certain types of expenditure, particularly for fixtures installed in buildings or structures.

Under the Capital Allowances Act 2001 (CAA01), recognised qualifying interests include: 

• The fee simple estate in the land (freehold ownership)
• A leasehold interest (a lease)
• An agreement to acquire a freehold or leasehold interest
• A licence to occupy land (must be exclusive according to HMRC)
• An easement or servitude or an agreement to acquire one.

It’s important to note that capital allowances are not available on expenditure relating to the land itself but may be claimed on qualifying assets such as fixtures or structures. 

Qualifying interest on fixtures explained 

Fixtures are items of plant and machinery that become part of the building or land when installed, for example, central heating systems or air conditioning. For capital allowances purposes, a person must meet specific conditions to be treated as the ’owner’ of the fixture and claim relief.

To claim capital allowances on fixtures, a person must:

• incur capital expenditure on the plant or machinery for the purposes of a qualifying activity (such as trade or property business)
• ensure the plant or machinery becomes a fixture
• hold a qualifying interest in the land at the time fixture is installed.

If multiple parties such as freeholders, leaseholders or tenants have an interest in the land and could claim capital allowances, the legislation typically gives precedence to the interest that is not in reversion. A leaseholder’s interest would generally take precedence over the freeholders for capital allowances purposes.

What happens if the qualifying interest for fixtures is not met?

If the qualifying interest is not met at the time of incurring the expenditure, then the owner of the fixtures would not be entitled to make a capital allowances claim.

This issue frequently arises in group structures such as when a parent company holds the lease or a subsidiary incurs expenditure on fit‑out works. Because the subsidiary does not hold the qualifying interest, it cannot claim capital allowances.

A practical workaround may be possible such as a sub‑lease or assignment to the subsidiary, subject to the terms of the original lease. However, in some cases, structural or legal constraints mean the problem cannot be rectified.

Real world cases we’ve seen where the qualifying interest for fixtures was not met include: 

Freehold and SPV mismatch

The freehold was held in one company and the construction works being undertaken by a special purpose vehicle (SPV), which had no qualifying interest in land. 

Part-built asset transfer within a group

A part-built asset is transferred from one group company to another group company, however the lease was not transferred, so the second group company had no interest in land at the point of incurring future expenditure. 

Renewables portfolio acquisition

During a due diligence review for the purchase of a portfolio of renewable assets in SPVs, it was identified that the assets held in the SPVs had no qualifying interest in land, which were all held by the parent. 

What this means for you and your business 

When claimed correctly, capital allowances can deliver significant savings to land and property owners or investors. However, success depends on:

• A clear understanding of qualifying interests
• Meticulous record-keeping, including pooling and fixed value agreements
• Expert guidance to navigate complex ownership structures and HMRC requirements 

By understanding these principles, businesses can optimise their tax position and make the most of the capital allowances available to them. 

For more information, get in touch with Jeremy Chapman and Stephen Foster.