Capital allowances and partnerships

From 6 April 2026, HMRC has introduced legislation to alter the future claim for capital allowances on qualifying assets. 

Following our previous article regarding the recent changes to the CAA2001 legislation, this note expands on the recent changes and provides further context with a case study.

Case study

• Lasting Value LLP
• Accounting year-end: 31 December 2026
• Partnership contains only UK resident individuals

Capital allowance tax relief options

Annual investment allowance at £1,000,000.

First year allowances (FYAs) at 40% on qualifying main pool plant and machinery. Main pool writing down allowances at 14% during accounting year 2 in respect of the remaining 60% of qualifying plant and machinery.

For partnerships, the main pool rate for capital allowances has reduced from 18% to 14% from 6 April 2026, therefore, the hybrid rate for the writing down of the main pool will be a combination of 95 days of 18% and 270 days of 14%, which is 15.04% for a 31 December 2026 year accounting year end.

Short life asset elections for separately identifiable qualifying plant and machinery.

Special rate writing down allowances on qualifying special rate fixtures and specific integral features at 6%.

Fixed asset additions

• Leasehold improvements: £500,000
• IT equipment: £1,000,000
• Motor vehicles: £100,000
• Electrical/water/space heating, cooling systems and air purification systems: £1,200,000
• Total: £2,800,000

The allocation of the AIA should be prioritised to the integral features to avoid the lowest writing down rate of 6% per accounting year. The balance of £200,000 will be introduced to the special rate pool in year one. 

Under CAA 2001 s.33A, "integral features" are a statutory category of assets which are deemed to qualify as plant or machinery, even though some might otherwise be regarded as part of a building. They are:

• Electrical systems, including lighting systems.
• Cold water systems.
• Space or water heating systems, powered systems of: 
  • ventilation,
  • air cooling,
  • air purification, including any floor or ceiling comprised in such a system.
• Lifts, escalators and moving walkways.
• External solar shading.

Consideration should be given as to whether the partnership should claim FYAs on 40% of the cost of IT equipment of £1,000,000 and then 60% will be added to the main pool in year two. If the partnership's IT policy for replacing laptops is, say, three years, then full relief can be obtained within three years via a short life asset election for each individual asset and the balancing allowance triggered when the assets are scrapped after accounting year three.

The claim for 40% FYAs will provide the initial accelerated capital allowances at £400,000 but then the 60% element of £600,000 will take 30 years to obtain around 99% tax relief being introduced in year two to the main pool.

A partnership may find it more equitable amongst the current and future partner group to spread the relief of new IT equipment rather than provide large initial tax relief for the partners of the partnership involved in year one.

Providing the IT equipment is separately identifiable and held within a fixed asset register, for example, a short life election should be made and the assets tracked.

The motor vehicles' emissions per km will need to be considered in order to determine the rate of capital allowances available. From 6 April 2027, no 100% first-year allowances are available on fully electric motor vehicles.

Cars with emissions 1 to 50g/km are eligible for main rate WDAs at 14%; cars with emissions over 50g/km are eligible for special rate WDAs at 6%.

The leasehold improvement additions will contain a vast number of elements which qualify at differing capital allowance rates, capitalised revenue deductions and structures and buildings allowances. The detailed statement of works will need to be obtained and reviewed on a line-by-line basis for the combination of reliefs available.

Deferred tax and equitable adjustments across the partner group

Partnerships may want to consider calculating the impact of deferred tax and recognise the asset, or liability, which is normally the case with accelerated capital allowances followed by the slow unwind of disallowable depreciation within the accounts.

Say, for instance, a partnership incurs £1,000,000 of qualifying capital expenditure on a leasehold office fit-out. The year one partners of the partnership would obtain a large amount of tax relief at this stage; however, the partners who join in future years will be taxed on the depreciation over the length of the lease. As partners move firms in a competitive industry, there is the potential to pocket the tax relief and then leave the remaining partners to take the hit on the depreciation.

The calculation of the deferred tax liability and a subsequent equalisation adjustment across the partner group would make a much fairer position for all.

The date in which expenditure is deemed to be incurred

This area may appear to be a matter of timing and not a material issue; however, it is very important to ensure this is correct and, depending on the circumstances of the business and the level of profits, a claim for AIA or changes in tax rates/thresholds could have a tax liability impact.

Capital allowances are given in the accounting period in which the expenditure is “incurred”.

The date in which expenditure is “incurred” is usually the date in which payment for the asset becomes unconditional; however there are specific rules where the length of time between delivery of the asset and payment exceeds four months.

If there is a gap of more than four months between delivery and payment, the expenditure is not “incurred” until the date on which payment is required to be made. If payment is made but no obligation to pay has arisen, then the expenditure is still not deemed to be incurred.

Consideration should be given as to when to pay for new capital expenditure since the timing in accordance with the above could help utilise a further accounting year's AIA.

The interaction of income tax and corporation tax basis for partnerships

A further complication in relation to a capital allowance claim made by a mixed partnership (say with both a corporate and an individual member) is that both income tax and corporation tax legislation must be considered.

Full expensing enables a business to claim 100% on qualifying main pool plant and machinery and 50% first-year allowances on qualifying special rate expenditure for assets acquired after 1 April 2023.

This is only available to corporates and, as such, two capital allowance computations should be completed, one under the income tax rules and the other under the corporate tax rules. Full expensing could make a significant difference to the taxable profit allocated to the corporate member.

It is essential that good record-keeping is maintained to correctly make a claim for this additional tax relief. This is because the tax written-down values will never align under the income and corporate tax basis when being carried forward, and full expensing has the potential for large balancing charges if proceeds are received on the disposal, or where Fixtures are disposed of on a property sale or lease assignment, which will lead to complex calculations for a compliant CAA2001/s198 Joint Election.

How can Crowe UK help?

We have a market-leading team of specialised tax advisors with knowledge and experience in completing timely and efficient capital allowance claims. We consider the commercial objectives of the partnership and business and ensure that the maximum tax relief available is obtained. Our specialists can assist at the planning, calculation and review stages of a capital expenditure project.

For further information, please contact your usual Crowe UK contact.