Tax issues rarely drive a deal, but they can materially affect its value. One area where this is particularly evident is the treatment of capital allowances on asset and property disposals. Capital allowances are a form of tax relief that lets businesses deduct the cost of qualifying capital assets, including fixtures within a building, such as heating, lighting, air-conditioning and lifts, from their taxable profits.

Section 198 and 199 elections under the Capital Allowances Act 2001 are a well‑known feature of commercial property transactions, yet they remain one of the most commonly mishandled aspects of a sale. Too often, the election is treated as a post‑completion formality rather than a commercial negotiating point – and the cost of getting it wrong can be substantial.

With increasing scrutiny from HMRC and the growing prevalence of reliefs such as the Structures and Buildings Allowance (SBA), this is an area where early, informed advice can make a real difference.

The two reliefs at stake

What is a section 198/199 election – and why does it matter?

In simple terms, a section 198 (freehold) or section 199 (leasehold) election is a joint election between a seller and buyer to establish the value of fixtures (such as heating systems, electrical installations and lifts) for capital allowances purposes. That agreed value then determines the disposal value for the seller, and the acquisition value for the buyer.

This matters because the buyer can only claim capital allowances on those fixtures where the seller has previously brought qualifying expenditure into their capital allowances computations, and the parties have agreed a fixed value through a valid election.

Without a valid election, the buyer's ability to claim allowances on fixtures can be severely restricted, and in many cases, lost entirely. A valid election is also time-limited: it must normally be made within two years of the transaction, a point covered in more detail below.

Structures and Buildings Allowances: a separate but related relief

SBA relief, available on qualifying construction expenditure under contracts entered into from 29 October 2018 onwards, is becoming an increasingly common feature of property transactions. The SBA gives relief for the cost of constructing, renovating, or acquiring non-residential buildings and structures, allowing that expenditure to be written down against taxable profits over a fixed period (currently 33⅓ years, at 3% a year).

Unlike plant and machinery allowances, claiming SBA requires a valid allowance statement to be passed from seller to buyer. Without this, the purchaser cannot continue to claim SBA – even if the expenditure would otherwise qualify.

From the buyer's perspective, this means verifying that an allowance statement exists, confirming it is complete and accurate, and ensuring it is contractually provided on or before completion. Although there is no negotiation over the quantum of the allowance (the buyer inherits whatever remains of the original 33⅓ year writing-down period), securing the statement itself is a practical pressure point. If the seller does not hand it over, the buyer gets nothing.

From the seller’s side, failing to deal with SBA properly can delay transactions or weaken negotiating leverage late in the process. This is because a buyer who finds, during due diligence, that the allowance statement is missing or incomplete can use that to push for a price reduction or to delay completion until the position is resolved – leverage the seller is unlikely to recover once contracts are close to exchange.

Where these deals go wrong

Leaving it too late

A recurring problem we see is that capital allowances are addressed too late in the transaction. By the time contracts are exchanged, the commercial leverage has usually shifted in favour of the buyer – and the seller’s appetite (and ability) to negotiate has diminished. From a practical perspective:

• buyers typically have more negotiating power, particularly in competitive processes or where allowances materially enhance the post‑tax return; and

• sellers may be forced into an election that is commercially unfavourable simply to get the deal done.

However, a seller with accumulated tax losses may be more willing to agree a higher election value. A higher value would ordinarily trigger a balancing charge (effectively clawing back allowances previously claimed), but if the seller has sufficient losses to absorb that charge, the real cost to them is reduced. Recognising this can open negotiating room that might not otherwise exist.

Where allowances are likely to be significant, the position on section 198/199 should be raised early – ideally alongside heads of terms – so expectations are aligned before the deal momentum builds.

When one party does not pay tax

Capital allowances can matter less to one side of a transaction where a non‑taxpayer is involved. Where the buyer or seller is a charity, a pension fund, or another entity that does not pay tax on its property income, the economic value of capital allowances may be limited or non‑existent for that party. In those cases, an election may not be required. There should be a just and reasonable apportionment of the purchase price to the fixtures.

Failing to follow through

A section 198/199 election must normally be made within two years of the purchaser’s acquisition (or lease commencement).

This deadline is frequently missed because:

• responsibility for progressing the election is not clearly allocated; or

• the parties assume that “agreement in the contract” is enough.

It is common for the sale and purchase agreement to include a clause requiring both parties to enter into a section198 election – but then for nobody to actually prepare and sign one. The two-year deadline from the date of the buyer’s acquisition can pass quickly, particularly where advisers change, and attention moves on to other matters. If the deadline is missed, the consequences are severe: the buyer loses entitlement to claim, and the seller faces a disposal value calculated on a different basis, potentially triggering a balancing charge.

The same principle applies to SBA documentation. The SBA allowance statement is less of a negotiating point as the value is fixed at the level of SBAs left on the 33⅓ year writing-down period. However, failing to secure the statement from the seller will prevent any claim to the allowances.

To manage this, it should be clearly agreed at the outset who is responsible for preparing the election, and a timetable should be set. If the seller has not yet pooled the relevant expenditure in their capital allowances computations, this needs to be done before the election can be finalised, and that pooling itself takes time and professional input.

Getting the paperwork wrong

HMRC expects comprehensive details about both the seller and buyer, including Unique Taxpayer Reference (UTR) numbers. Missing or incorrect details can render the entire election invalid. This seems straightforward, but it is one of the most frequent reasons for rejection.

Errors in the property address, title number, or the nature of the interest (freehold versus leasehold) cause avoidable problems. Remember that section 198 applies to freehold transactions and section 199 to leaseholds. Using the wrong section for the type of interest involved is a basic error, but one that occurs more often than it should.

How we can help

Section 198 and 199 elections are not just a compliance exercise – they are a commercial tool that can materially affect deal value. Handled well, they create certainty and protect valuable tax relief. Handled poorly, or left too late, they can undermine an otherwise successful deal.

We help our clients by identifying the capital allowances position early in the transaction, advising on the commercial impact of the election value, ensuring the paperwork is properly prepared and submitted within the deadline, and processing the figures correctly in the tax computations.

If you are buying or selling commercial property and want to make sure the capital allowances position is properly managed, we would be happy to discuss how we can help. Please fill in the form below and one of our team will be in touch.