Capital Allowances in M&A

In UK M&A, capital allowances can still influence deal value in ways many buyers underestimate. This is particularly true in asset-heavy transactions involving property and fixtures. The key issue is not simply whether qualifying expenditure exists but whether the buyer can preserve entitlement to make capital allowance claims after completion. Fixtures analysis should now sit alongside legal and financial due diligence, rather than follow it.

Why capital allowances matter more in M&A

Higher borrowing costs and tighter return expectations have led buyers to focus more closely on after-tax performance. In this environment, deal structure becomes increasingly important. Asset purchases can, in some cases, preserve access to qualifying expenditure on plant and machinery, but only where the fixtures rules are handled correctly. This can improve post-deal cashflow from the first affected chargeable period.

What is a section 198 election?

In many property-rich transactions, the key issue is not whether assets are present but whether the buyer can preserve entitlement to a claim on fixtures embedded within the property. HMRC guidance confirms that, where a relevant interest in land containing fixtures is sold and the statutory conditions are met, a joint section 198 election can fix the seller’s disposal value and the buyer’s qualifying expenditure. This differs from moveable chattels, which are typically addressed through a just and reasonable apportionment rather than the fixtures code. Where an election is unavailable, invalid, or inconsistent with the underlying facts, valuable capital allowance claims can be lost or restricted.

Why does fixtures' due diligence matter?

Since the fixtures rules changed, buyers can no longer assume they will be able to claim later just because qualifying assets are present in a building. HMRC guidance explains that relief for second-hand fixtures depends on the seller having pooled qualifying expenditure prior to the transfer and on the parties meeting the fixed value requirement, usually within two years. 

Timing is critical. If expenditure has not been pooled in the seller’s relevant chargeable period, or if the transfer value is not fixed properly, the buyer’s entitlement may be reduced to nil – even where the physical assets are clearly present.

In practice, this often affects hotel and specialist real estate deals. A buyer may acquire a trading hotel with lifts, air conditioning, lighting, and other embedded plant that forms part of the operation. Commercially, the buyer may assume these fixtures carry allowance value. However, tax law is narrower. If the seller has not pooled the qualifying expenditure or if the parties do not agree on a valid transfer value in time, the buyer may inherit the assets without the associated tax history needed to support capital allowance claims. This can weaken the deal model and reduce expected relief over later chargeable periods.

How do capital allowances change negotiations?

These considerations do not sit outside the transaction. They shape it. Buyers may adjust pricing where fixture entitlement is clear, where the seller has pooled qualifying expenditure, and where a valid section 198 election can be agreed on commercial terms. 

Sellers, in turn, may need to balance a buyer’s desire for allowance value against their own disposal consequences. In sectors such as hotels, healthcare property, and infrastructure, this can become a visible element of the negotiation rather than a hidden tax workstream.

Protect deal value with early capital allowances and fixtures' due diligence

Capital allowances will not determine every transaction, but in the right context, they can materially affect value, timing, and negotiation leverage. Buyers should assess fixture entitlement as early as the headline terms stage, particularly in asset-heavy sectors. Leaving the issue until completion can narrow options, delay claims, and weaken outcomes.

If you are considering an acquisition, Crowe can support with reviewing fixture entitlement, transfer values, and timing before contracts are finalised. Early analysis can strengthen capital allowance claims, more realistic pricing, and help establish a more robust filing position in the event of an HMRC review.