If you own rental property, you are probably familiar with claiming repairs and maintenance as tax deductions. But what about the cost of the building itself or the fixtures inside it? That is where capital allowances come in, and specifically the Annual Investment Allowance (AIA).
This article explains how capital allowance AIA works for UK landlords, which properties qualify, and what you need to know before making a claim. We cover the rules for residential, commercial, and furnished holiday lets, including the recent abolition of the FHL regime.
What Are Capital Allowances?
Capital allowances let you deduct the cost of certain capital assets from your taxable profits. Instead of claiming the full cost in one year (which you cannot do for capital items), you spread the relief over the asset's useful life or claim it through specific allowances like the AIA.
For landlords, the most common capital allowances relate to plant and machinery. This includes things like boilers, lifts, air conditioning, fire alarms, and kitchen fittings. The key point is that the asset must be part of the building's infrastructure or services, not just general repairs.
What Is the Annual Investment Allowance (AIA)?
The Annual Investment Allowance (AIA) is a specific type of capital allowance. It allows you to claim 100% of the cost of qualifying plant and machinery in the year you buy it, up to a set annual limit. For the 2025/26 tax year, the AIA limit is £1 million for most businesses.
This is a generous relief. If you spend £50,000 on a new boiler and heating system for a commercial property, you can deduct the full £50,000 from your taxable profits in that year, rather than spreading it over several years.
However, there is a catch for landlords. The AIA is not available for all types of property letting. The rules depend on whether your rental activity is treated as a business or as an investment.
Can Residential Landlords Claim Capital Allowance AIA?
Generally, no. Residential landlords letting unfurnished or partly furnished properties cannot claim capital allowances on plant and machinery in the dwelling. This restriction has been in place since April 2016 for furnished residential lets.
The reason is that HMRC treats residential property letting as an investment activity, not a trade. Capital allowances are designed for businesses that use plant and machinery in their trade. Since residential letting is not a trade, the allowances do not apply.
There is one exception: furnished holiday lettings (FHLs). Until April 2025, FHLs were treated as a trade for tax purposes, meaning landlords could claim capital allowances on furniture, fixtures, and equipment. However, the FHL regime was abolished from 6 April 2025. This means that from the 2025/26 tax year onwards, former FHL properties are treated as standard residential lets for capital allowance purposes.
If you previously claimed capital allowances on an FHL property, you may need to adjust your tax position. Speak to a property accountant to review your claims.
Can Commercial Landlords Claim Capital Allowance AIA?
Yes. Commercial property landlords can claim capital allowances, including the AIA, on qualifying plant and machinery in their let properties. This includes offices, shops, warehouses, and industrial units.
The key difference is that commercial letting is treated as a business activity for capital allowance purposes. HMRC accepts that commercial landlords are carrying on a trade, so the AIA and other capital allowances are available.
Common qualifying items in commercial properties include:
- Heating and ventilation systems
- Lifts and escalators
- Electrical systems (lighting, wiring)
- Fire alarm and security systems
- Sanitary fittings and kitchen equipment
- Air conditioning and cooling systems
The AIA limit of £1 million applies to the business as a whole, not per property. If you own multiple commercial properties, you must allocate the allowance across your total qualifying expenditure.
How Does the AIA Work for Mixed-Use Properties?
If you own a building with both residential and commercial parts, the rules get more complex. You can claim the AIA on the commercial part but not on the residential part. You must apportion the cost of shared assets, such as a communal heating system, between the two uses.
For example, a building with a shop on the ground floor and a flat above. The shop qualifies for capital allowances; the flat does not. If you install a new boiler that heats both, you can only claim the AIA on the proportion attributable to the shop.
HMRC expects a reasonable basis for apportionment, typically floor area or heat output. Keep detailed records to support your claim.
What About Serviced Accommodation and HMOs?
Serviced accommodation and houses in multiple occupation (HMOs) fall into a grey area. HMRC may treat them as trades if the level of services provided is significant, such as daily cleaning, meals, and concierge services. In that case, capital allowances could be available.
However, the abolition of the FHL regime has made this less certain. Many serviced accommodation operators are now reviewing their tax status. If you run a serviced let or HMO, get professional advice on whether your activity qualifies as a trade for capital allowance purposes.
Our guide on what a property accountant does explains how specialists can help with these complex areas.
What Is Not Covered by the AIA?
The AIA does not apply to all capital expenditure. The following items are excluded:
- Cars (separate rules apply)
- Land and buildings (the structure itself)
- Assets used for residential letting (as discussed)
- Assets given to you as a gift
- Assets bought before you started the business
Also, the AIA cannot create or increase a loss for most unincorporated businesses. If your AIA claim pushes you into a loss, you may not be able to use the full relief in that year. Check the rules carefully.
How to Claim Capital Allowance AIA
To claim the AIA, you include the qualifying expenditure in your capital allowances computation and enter the amount on your tax return. For sole traders and partnerships, this is done on the self-assessment return. For limited companies, it goes on the corporation tax return.
You must identify the specific assets you are claiming for and show that they qualify as plant and machinery. HMRC may ask for evidence, so keep invoices, contracts, and asset registers.
If you are unsure whether an item qualifies, it is worth getting a specialist review. Many landlords miss out on legitimate claims because they do not know what counts as plant and machinery. A property accountant can help you identify qualifying expenditure and prepare the claim.
Capital Allowances vs. Repairs and Maintenance
A common mistake is confusing capital allowances with repairs. Repairs are revenue expenses that you can deduct in full in the year they occur. Capital allowances apply to the cost of buying or improving a capital asset.
For example, replacing a broken window is a repair. Installing double glazing for the first time is a capital improvement. The first is deductible as a revenue expense; the second may qualify for capital allowances if it is plant and machinery.
HMRC provides guidance on the distinction, but it can be subjective. If you are unsure, get advice before filing your return.
What Happens When You Sell a Property?
When you sell a property on which you have claimed capital allowances, you may need to adjust your tax position. The proceeds from the sale of qualifying assets are treated as a balancing charge, which effectively claws back the allowances you claimed.
This is important for commercial landlords. If you sell a property and the buyer continues to use it for business, they may be able to claim capital allowances on the fixtures. You should agree a capital allowances value with the buyer at the point of sale to avoid disputes later.
For residential landlords, this is less of an issue because you cannot claim capital allowances in the first place. However, if you previously claimed allowances on an FHL property, the sale may trigger a balancing charge.
Key Takeaways for Landlords
- Capital allowance AIA is available for commercial property landlords but not for standard residential lets.
- The AIA limit is £1 million per business per year (2025/26).
- Furnished holiday lets lost their special status from April 2025, meaning capital allowances are no longer available for new expenditure.
- Mixed-use properties require careful apportionment.
- Always keep detailed records of qualifying expenditure.
If you are a landlord with commercial property or a mixed portfolio, capital allowances can reduce your tax bill significantly. But the rules are technical, and mistakes can be costly. Our team at Property Tax Partners can help you review your position and make the right claims. Contact us to discuss your situation.
For a broader overview of tax reliefs available to landlords, see our complete list of landlord tax deductions.