Capital Allowances and Property: The Legals Are Important

While this is fundamentally a legal issue rather than a tax issue, it carries significant tax repercussions.

When claiming capital allowances on property-related expenditure, one of the criteria is that the company incurring the cost must have an interest in the land. For capital allowance purposes, this interest is typically by way of a licence to occupy.

Section 175 of the Capital Allowances Act 2001 refers specifically to a license, not a lease. In practice, this can give rise to situations where a company undertakes works under a presumed or informal licence before any formal lease is granted. In such cases, there may be no legal documentary evidence to prove the existence of a licence at the time the expenditure was incurred.

You might argue that the landlord (lessor) granted permission to the tenant (lessee) to carry out the works—but this is a risky position to take, especially in the event of an HMRC enquiry. HMRC’s interpretation of the law is that an exclusive licence is required (i.e. a formal lease or written licence), and they explain this position in their Capital Allowances Manual at CA26100.

Having a clear lease agreement or documented licence in place—preferably with legal confirmation that the lessee holds an interest in the land—will help resolve any HMRC enquiry more quickly and minimise risk. If no written licence exists, the company will need to demonstrate to HMRC that a licence was in fact granted. This could unnecessarily complicate and prolong the enquiry process.

Establishing whether a licence or lease constitutes an interest in land is a legal matter. To avoid uncertainty, it’s important to seek legal confirmation that the lessee holds a qualifying interest before making a capital allowances claim. Once this position is clarified, we can apply the relevant tax treatment with confidence.

While every care and attention has been taken to ensure the accuracy of the information contained in this publication, it has been prepared in general terms and does not constitute advice. It should only be regarded as general guidelines. The information may change over time and is not a substitute for professional advice. Users are encouraged to verify the information independently or consult one of our qualified professionals at EOACC LTD for specific guidance. Any liabilities or losses arising, or enquiries raised by HM Revenue and Customs or any other parties, due to the taking or refraining of actions referred to in this publication are not the responsibility of EOACC LTD.