Capital Allowances Explained

Capital allowances legislation is contained mainly in the Capital Allowances Act 2001. The legislation runs to over 400 pages of small print that interact with other parts of the UK Taxes Acts.

This website only has a few pages and therefore only provides a flavour of some of the most relevant issues.

The best way of understanding how capital allowances may help you to reduce your tax bill is to speak with us, tell us a little about your property and let us describe how we could help you.
If you are not able to speak with us yet, take a look at our website to see if any of our pages are relevant.

If you would like to see if we can help you to use your Capital Allowances to save your money please call us on
0333 939 8555.

What are Capital Allowances?

Capital Allowances are tax depreciation given for capital expenditure on certain assets for UK tax purposes.

In the UK, along with many other countries, accounting depreciation charged to the profit and loss account is not deductible for tax purposes. Instead, accounting depreciation is added back and, if available, depreciation for UK tax purposes is given by way of Capital Allowances.

Capital Allowances Act 2001 is a statutory code that gives tax relief on a coherent and uniform basis to all taxpayers in respect of certain types of capital expenditure incurred.

Capital Allowances Act 2001 allows taxpayers to claim tax relief in respect of capital expenditure.

The rates of allowances vary from 150% of the expenditure incurred in a full accounting period to 2% of the expenditure incurred in the same period.

How are Capital Allowances Given?

Capital Allowances are available to reduce the amount of profits charged to tax in an accounting period.  Depending upon the timing of expenditure and the asset upon which the expenditure provides, the taxable profits are reduced by a proportion of the capital expenditure incurred.

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Example 1

If a company incurs £100,000 of expenditure on Land Remediation works the company’s taxable profits are reduced by £150,000 (£100,000 * 150%).

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Example 2

If a company incurs £100,000 of expenditure on items qualifying for Enhanced Capital Allowances, the company’s taxable profits are reduced by £100,000.  Similarly if the company incurs expenditure on any other asset that qualifies for the 100% relief the same reduction to taxable profits are made.

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Example 3

If an individual incurs £100,000 of expenditure on providing a sprinkler installation in one of his properties the individual’s taxable profits are reduced by £18,000 (£100,000 * 18%) in the year of expenditure.  In the following year, the individual’s taxable profits are reduced by a further £14,760 ((£100,000 – £18,000) * 18%).  This process is repeated until the whole amount is written-off.