Annual Investment Allowance UK: A Property Investor's Guide to the £1m Permanent Cap

What is the Annual Investment Allowance?

The Annual Investment Allowance (AIA) is a capital allowance that lets a business deduct the full cost of qualifying plant and machinery from its taxable profits in the period the expenditure is incurred, instead of writing the cost down a little each year. In effect it brings forward 100% of the tax relief into year one, up to an annual cap.

That cap is £1 million, and it is permanent. The figure is set out in section 51A(5) of the Capital Allowances Act 2001, which reads, in terms, "The maximum allowance is £1,000,000" ^[1]. The permanence is the part that trips up older guidance. For several years before 2023 the £1 million was a temporary uplift sitting above a £200,000 baseline, due to revert. That changed: Finance (No. 2) Act 2023 section 8 made the £1 million the permanent maximum, with effect for chargeable periods beginning on or after 1 April 2023 ^[2]. There is no expiry date and no scheduled reversion to £200,000. If you have read that the cap "expires on 31 March 2026" or is "temporary", that framing is out of date.

The AIA is open to sole traders, partnerships and limited companies alike. What it requires is a qualifying activity within CAA 2001 section 15: typically a trade, a UK property business or an overseas property business. The relief is not available simply because you own a building; it attaches to plant and machinery used in a qualifying activity. For the full Capital Allowances Act framework and the decision tree behind every allowance, see our complete capital allowances pillar for property investors.

The AIA at a glance (2026/27)

The table below summarises where the AIA sits among the main plant and machinery allowances. The figures are current for 2026/27 and verified against legislation.gov.uk.

Allowance	Rate	Annual cap	Who can claim	Statute
Annual Investment Allowance (AIA)	100% in year of spend	£1,000,000 (permanent)	Companies, sole traders, partnerships	CAA 2001 s.51A
Full expensing	100% in year of spend	No cap	Companies only	CAA 2001 s.45S
40% first-year allowance (new from 1 Jan 2026)	40% in year of spend	No cap	Companies, sole traders, partnerships	CAA 2001 s.45U (FA 2026 s.29)
Main pool writing-down allowance	14% reducing balance	n/a	All	CAA 2001 s.56(1)
Special-rate pool writing-down allowance	6% reducing balance	n/a	All	CAA 2001 s.104D

Two points to flag now, because they cause the most confusion. First, the main pool writing-down allowance fell from 18% to 14% for chargeable periods beginning on or after 1 April 2026 (corporation tax) or 6 April 2026 (income tax), under Finance Act 2026 section 28 ^[3]. The special-rate pool stays at 6%. Second, the new 40% first-year allowance introduced by Finance Act 2026 is a separate relief from the AIA, not a feature of it. We deal with both later in this guide.

Can you claim capital allowances on an investment property? The section 35 trap

This is the single most important question for a property investor, and it is the one that gov.uk's generic guidance does not answer. The short version: it depends on whether the property is residential or commercial.

Section 35 of CAA 2001 states, in terms, that expenditure on plant or machinery for use in a dwelling-house does not qualify for capital allowances where the activity is a property business ^[4]. That bar applies to the AIA exactly as it applies to ordinary writing-down allowances. So for a standard residential buy-to-let, the boiler, the fitted kitchen, the bathroom suite and the white goods inside the let dwelling are blocked. You cannot claim the AIA on them. This is why residential landlords so often discover, to their surprise, that capital allowances are simply not a meaningful relief for ordinary letting.

There are two contexts where the section 35 bar does not bite, and where the AIA becomes valuable:

• Commercial property. Offices, shops, warehouses, surgeries and other non-dwelling premises are not caught by section 35. The integral features and qualifying plant inside them can carry a substantial AIA claim. See our guide on what you can claim on capital allowances for commercial property.
• Common parts of a multi-let residential building. The section 35 carve-out covers plant in the communal areas of a building containing dwellings: the shared boiler serving a block of flats, the lift, the lighting in the common hall, the entry system. These are not "in a dwelling-house" and so escape the bar. For HMOs in particular this is the practical claim base, explained in detail in our HMO common-parts capital allowances guide.

So when someone searches "can you claim capital allowances on investment property", the honest answer is: rarely on residential dwellings, frequently on commercial property and HMO common parts. The AIA is best understood as a commercial-property relief that also reaches the shared mechanical and electrical plant in multi-let residential buildings.

What plant and machinery actually qualifies?

Assuming the section 35 bar is cleared (commercial property, or common parts), the next question is what counts as qualifying plant and machinery. The Capital Allowances Act draws three lines.

• The building shell does not qualify. Section 21 puts walls, floors, ceilings, doors, gates, shutters, windows, stairs, and the basic mains services into "List A", treating them as building rather than plant.
• Structures do not qualify under the plant rules. Section 22 excludes "List B" structures such as roads, car parks, bridges, docks and boundary walls (these may instead attract the separate Structures and Buildings Allowance at 3%).
• List C restores genuinely plant-like items. Section 23 carves back into the claim things that are fixed to the building but function as plant, including machinery, computer and electrical equipment, and certain trade-specific items.

The most valuable category for a property fit-out is usually integral features under section 33A: electrical and lighting systems, cold water systems, space and water heating, powered ventilation and air cooling, lifts and escalators, and external solar shading. These are special-rate items, but they are AIA-eligible, so the AIA can give them a 100% deduction up front rather than the slow 6% writing-down they would otherwise attract. Cars are never AIA-qualifying (there is a separate first-year allowance route for zero-emission cars). And note one genuine advantage over full expensing: the AIA can be claimed on second-hand and used plant, whereas full expensing is restricted to new and unused assets.

Worked example 1: a commercial fit-out within the cap

Consider an anonymised case: a Manchester investor who buys a tired city-centre commercial unit and fits it out. Over the accounting period they incur:

• £90,000 on a new heating and ventilation system (integral feature, section 33A)
• £25,000 on new electrical and lighting systems (integral feature)
• £20,000 on loose plant and equipment used in the business

Total qualifying expenditure is £135,000, comfortably inside the £1 million AIA cap. The investor can claim the full £135,000 as a deduction against the profits of the period. If the business is run through a limited company, that removes £135,000 from taxable profit; at the 25% main rate of corporation tax the relief is worth £33,750 in tax. If the investor is an individual higher-rate taxpayer, the £135,000 deduction reduces income taxed at 40%, a relief of £54,000. The point of the example is mechanical, not a promise of outcome: the AIA converts a capital outlay into an immediate, full deduction, and the cash value depends on the rate of tax that profit would otherwise have borne.

Accounting periods and the pro-rated cap

The £1 million cap is set by reference to the chargeable period, and it is pro-rated for any period that is not 12 months long. A 9-month period gives a cap of 9/12 of £1 million, which is £750,000 ^[5]. For a long period (a company can have an accounting period longer than 12 months only in limited cases), the calculation is split. The pro-rating matters mostly to companies, whose AIA tracks the company accounting period; for sole traders and partnerships the period is normally the tax year (6 April to 5 April).

Timing within the period is also load-bearing. You claim the AIA in the period the expenditure is incurred, which for plant bought outright is generally the date you become obliged to pay. Bringing a large purchase a few weeks forward or back across a period-end can move the relief by a full year, which is worth planning around if profits in one period are materially higher than the next.

Worked example 2: spending above the £1 million cap

Suppose an investor fitting out a large commercial scheme incurs £1.4 million of qualifying plant in a single 12-month period. The AIA covers the first £1 million in full. The remaining £400,000 is not lost; it drops into the writing-down allowance pools and is relieved gradually. Main-pool plant attracts 14% a year on a reducing balance from April 2026; special-rate items (most integral features) attract 6%.

A company in this position has a better route for the excess: full expensing under CAA 2001 section 45S gives a 100% deduction with no cap, on new and unused main-rate plant, for companies within the charge to corporation tax ^[6]. So a company spending £1.4 million on new main-rate plant could relieve the £400,000 excess immediately under full expensing rather than writing it down at 14%. The mechanics of full expensing, the 50% special-rate companion, and how they interact with the AIA for SPVs, are covered in our full expensing guide.

The single allowance trap for company groups and SPVs

This is where landlords who hold property through several special purpose vehicles get caught. The AIA is not one-per-company in a group; it can be one between several companies.

• A single company is entitled to one AIA across all its qualifying activities (section 51B).
• A parent and its subsidiaries share a single AIA between them, which they can allocate as they think fit (section 51C).
• Two or more companies that are both under common control and "related" share a single AIA (section 51E). "Control" is defined at section 51F, and the "related" test at section 51G turns on whether the companies share premises or carry on similar activities.

For a typical landlord group, this means a holding company sitting over several property SPVs may have a single £1 million AIA to share across the group, not £1 million for each SPV. The allocation can be planned, but it has to be planned deliberately. The deeper mechanics of how the single allowance is allocated, and how the association rules interact with the wider corporate group tests, are set out in our dedicated guide to the £1m AIA cap, allocation strategy and association rules. If you are weighing up whether to hold property personally or through a company in the first place, our buy-to-let limited company guide walks through the trade-offs.

Worked example 3: two SPVs sharing one AIA

An investor holds two commercial units in two separate SPVs, both wholly owned by the same holding company, both managed from the same office. Because the companies are under common control and related, they share a single £1 million AIA under section 51E. In a year where SPV A incurs £700,000 of qualifying plant and SPV B incurs £600,000, the group cannot claim £1 million in each. It has £1 million of AIA to allocate between them. A sensible allocation might give SPV A the full £700,000 and SPV B the remaining £300,000, with SPV B's surplus £300,000 going into its writing-down pool (or full expensing if the plant is new and unused). Getting the allocation wrong, by assuming each SPV has its own £1 million, leads to an over-claim that HMRC will unwind.

The AIA and the cash basis

If you are a sole trader or partnership using the cash basis of accounting, you can only claim plant and machinery capital allowances on cars; the AIA is not available for other plant under the cash basis. To claim the AIA on general plant and machinery, an unincorporated business must use the accruals (traditional accounting) basis. Companies do not use the cash basis, so this restriction does not affect them. If you are weighing up the cash basis against traditional accounting for your lettings, our rental income tax guide for landlords sets out how each basis works.

The new 40% first-year allowance: separate from the AIA

Finance Act 2026 introduced a brand-new 40% first-year allowance on main-rate new and unused plant and machinery, for expenditure incurred on or after 1 January 2026 (section 29 of the Act, inserting a new first-year allowance into CAA 2001). It is important to understand that this is a distinct allowance, not a change to the AIA. Two features make it useful in cases the AIA and full expensing do not reach:

• It is deliberately available to unincorporated businesses, sole traders, partnerships and individual landlords, as well as to leasing, where company-only full expensing is not available.
• It applies to main-rate plant. It excludes cars, second-hand or used assets, and assets for leasing overseas.

For an unincorporated landlord with a commercial property who spends above the £1 million AIA cap on new main-rate plant, the 40% first-year allowance can relieve part of the excess up front rather than at the 14% writing-down rate. Where the AIA, full expensing and the new 40% allowance overlap, the AIA usually remains the most generous on the first £1 million because it gives a 100% deduction to everyone; the 40% allowance is most valuable on amounts above the cap for businesses that cannot use full expensing.

Other allowances to be aware of

• Full expensing (section 45S): 100%, no cap, companies only, new and unused main-rate plant. The natural choice for incorporated investors spending above the AIA cap.
• Special-rate first-year allowance: a 50% companion to full expensing for new special-rate (integral feature) plant, again companies only.
• The super-deduction: the 130% relief that ran from 1 April 2021 to 31 March 2023 has expired. It is relevant now only to disposal-value clawback calculations on assets originally claimed during that window. It is not a current allowance.
• Zero-emission car first-year allowance (section 45D): 100% for new, unused cars with zero CO2 emissions, running to 31 March 2027 (corporation tax) or 5 April 2027 (income tax), extendable by the Treasury. Cars are never AIA-qualifying, so this is the only first-year route for cars.

What happens on disposal: the clawback to watch

An AIA claim is not free of consequences when you later sell. When plant on which allowances have been claimed is sold or otherwise disposed of, a disposal value is brought into the relevant pool. If the disposal value exceeds the unrelieved balance in the pool, the difference is a balancing charge, a taxable receipt that effectively claws back relief already given. For property, this most commonly arises when fixtures are sold with a building. The mechanics, including the seller-side disposal values and the buyer-side section 198 election, are explained in our guide to balancing allowances and balancing charges on disposal. The practical takeaway: claim the AIA, but record what you claimed, because it affects the tax on a later sale.

Furnished holiday lets: the regime is gone

Older guidance often treats furnished holiday lettings (FHLs) as a special category with access to the full plant and machinery claim base. That route closed. The FHL regime was abolished from 6 April 2025 for income tax and 1 April 2025 for corporation tax by Finance Act 2025 Schedule 5. From those dates, a former FHL is an ordinary property business, and the section 35 dwelling-house restriction applies in full to new expenditure. Plant and machinery pools built up before abolition are grandfathered and can continue to be written down, but no new FHL-route plant claims arise. The transitional treatment of those grandfathered pools is covered in our FHL capital allowances after April 2025 guide.

How much tax does an AIA claim actually save?

An AIA claim reduces taxable profit, so its cash value tracks the rate that profit would otherwise have been taxed at. For a company, that is corporation tax (currently 19% on small profits up to £50,000 and 25% above £250,000, with marginal relief in between). For an individual landlord it is your marginal income tax rate.

One change is worth planning around. From 6 April 2027, property income in England and Northern Ireland is taxed under separate rates of 22% (basic), 42% (higher) and 47% (additional), enacted by Finance Act 2026 sections 6 to 7; the percentages were announced at the Autumn Budget 2025. Scotland and Wales set their own rates. Because an AIA deduction reduces the property profit those rates apply to, the value of an unincorporated landlord's allowance shifts slightly from that date. For the wider picture of how the 2027 changes affect a property portfolio, see our property investment tax guide.

How to claim the AIA

You claim the AIA through your Self Assessment tax return or your company tax return. In practice:

1. Identify the qualifying plant and machinery for the period, and clear the section 35 dwelling-house test (commercial, or common parts only).
2. Total the qualifying expenditure and apply the £1 million cap (pro-rated for a short period, and shared across the group if section 51E applies).
3. Enter the claim in the capital allowances section of the return; allocate any excess above the cap to the main or special-rate pool, or to full expensing if you are a company.
4. Keep the invoices, dates and a breakdown of what you treated as qualifying plant, because the disposal computation on a later sale depends on it.

Fit-out and refurbishment claims, particularly on commercial property and HMOs, reward a careful split between the building shell (no claim), integral features (special rate, but AIA-eligible) and loose plant. If you are unsure whether a specialist is worth involving, our guide to what a property accountant does sets out where the value lies.

Common mistakes to avoid

• Treating the cap as temporary. The £1 million is permanent (section 51A(5); permanent from 1 April 2023 under Finance (No. 2) Act 2023 section 8). There is no 31 March 2026 deadline.
• Claiming on residential dwelling plant. Section 35 blocks plant inside a let dwelling. The claim base is commercial property and multi-let common parts.
• Assuming each group company has its own £1 million. Related companies under common control share one AIA (section 51E).
• Confusing the AIA with full expensing. Full expensing is company-only and uncapped; the AIA is open to everyone but capped at £1 million.
• Forgetting the cash-basis restriction. On the cash basis, unincorporated businesses can only claim plant and machinery allowances on cars.
• Ignoring the disposal clawback. Allowances claimed can be clawed back as a balancing charge when the plant or building is sold.

Is the AIA right for your property business?

The AIA is most valuable to investors who:

• own or are fitting out commercial property (offices, shops, warehouses, surgeries);
• operate HMOs or blocks of flats with significant communal plant in the common parts;
• are making real capital improvements rather than revenue repairs; and
• have enough taxable profit in the period to absorb the deduction.

For a straightforward residential buy-to-let, the AIA will rarely do much, because section 35 blocks plant inside the dwelling and most of your costs are revenue repairs (deductible against rent in the normal way) rather than capital. Where the AIA genuinely bites, the planning, what qualifies, how the cap is shared, and how it interacts with full expensing and the new 40% allowance, is worth getting right before you file. Contact our team to scope a claim, or read our complete list of landlord tax deductions to see how capital allowances sit alongside your everyday deductible costs.

Sources

1. legislation.gov.uk: Capital Allowances Act 2001, section 51A (Entitlement to annual investment allowance, maximum £1,000,000)
2. legislation.gov.uk: Finance (No. 2) Act 2023, section 8 (permanent £1m AIA from 1 April 2023)
3. legislation.gov.uk: Capital Allowances Act 2001, section 56 (main pool WDA 14%, substituted by Finance Act 2026 s.28)
4. legislation.gov.uk: Capital Allowances Act 2001, section 35 (dwelling-house restriction)
5. gov.uk: Claim capital allowances: Annual investment allowance - GOV.UK
6. legislation.gov.uk: Capital Allowances Act 2001, section 45S (full expensing, companies only)
7. icaew.com: Capital allowances | Tax - ICAEW.com