Capital Allowances on Mixed Use

Capital allowances let a business deduct the cost of certain equipment and, in limited circumstances, buildings from taxable profit over time. Ordinary residential lettings are almost entirely shut out of this system: a dwelling itself does not qualify, and furniture inside it is dealt with separately through replacement of domestic items relief rather than capital allowances. Own a mixed-use property, a shop with a flat above it, or a converted commercial building with residential units, and the commercial element genuinely opens the door to capital allowances that the residential element cannot access.

This guide sets out what capital allowances actually cover, why the split between the commercial and residential parts of a mixed-use property matters, and how to keep the apportionment defensible if HMRC ever asks.

Why residential property misses out

Two of the main capital allowances routes are specifically closed off to dwellings. Plant and machinery allowances, which cover the cost of equipment, fixtures and fittings used in a business, are not available for items in a dwelling let as a private residence, because HMRC treats furnishing a home as a private, not a business, activity even though the home happens to be let out. The Structures and Buildings Allowance, a 3% straight-line annual deduction on the construction or renovation cost of qualifying buildings, has an explicit residential exclusion: a building in residential use, meaning used as a dwelling or for anything ancillary to one such as a shared gym or car park serving flats, cannot qualify at all.

This is why an ordinary buy-to-let landlord relies on replacement of domestic items relief for furniture and appliances rather than capital allowances, which we cover in full in our replacement of domestic items relief guide, and why the cost of the building itself is generally locked up as a capital cost that only reduces a future Capital Gains Tax bill, as explained in our capital gains tax on rental property guide.

Where the commercial element changes things

A mixed-use building, most commonly a ground-floor shop, office or other commercial unit with residential flats above, is not treated as a single dwelling for capital allowances purposes. The commercial element is a genuine non-residential business use, which brings both main capital allowances routes back into play for the costs that relate specifically to it:

• Plant and machinery in the commercial unit. Fixtures such as heating and ventilation systems, fire and security alarms, kitchen equipment in a commercial unit, and fit-out costs used in the commercial letting can qualify for plant and machinery allowances. Most spending of this kind can be relieved in the year it is incurred through the Annual Investment Allowance, up to its current annual limit, rather than spread over many years.
• Structures and Buildings Allowance on the commercial fabric. Construction, renovation or conversion costs attributable to the non-residential part of the building can qualify for the 3% straight-line allowance, provided the building was brought into qualifying, non-residential use and the expenditure is on contracts entered into after the relevant 2018 start date for the relief.

The residential flats above the shop remain outside both routes. Furniture and appliances inside them still fall under replacement of domestic items relief, and the fabric of the residential part of the building still has no capital allowances route available to it at all.

Apportioning the costs

Where a single piece of expenditure covers both elements, for example a new roof, a shared boiler serving the whole building, or a rewiring project touching both the shop and the flats above, HMRC expects a just and reasonable apportionment between the qualifying commercial element and the non-qualifying residential element. There is no fixed formula; the apportionment should reflect the actual split of use, commonly by floor area, by the relative cost of comparable standalone work on each part, or by a specialist capital allowances surveyor's assessment for larger or more complex projects.

Worked example. A landlord buys a building comprising a ground-floor shop and two flats above, and spends £40,000 refurbishing the whole structure, including a new heating system, rewiring, and redecoration throughout. A surveyor apportions the cost 30% to the commercial unit and 70% to the residential flats, based on floor area and the specification of work in each part. The £12,000 attributed to the commercial unit can be considered for plant and machinery allowances (for the heating and electrical fixtures) and the Structures and Buildings Allowance (for the qualifying structural element), while the £28,000 attributed to the flats is either a revenue repair, deductible against rental income in the normal way, or a capital cost added to the property's base cost for Capital Gains Tax, depending on whether it restores or improves the flats, following the same revenue-versus-capital test covered in our landlord allowable expenses guide.

Integral features and the special rate pool

Within plant and machinery allowances, certain items are classed as integral features and pooled separately at a lower annual writing-down rate than general plant and machinery once they fall outside the Annual Investment Allowance. These typically include electrical and lighting systems, cold water systems, lifts and escalators, and heating and air conditioning systems. For a mixed-use building this distinction mainly affects the pace of relief on the commercial element rather than whether relief is available at all, since most spending within the Annual Investment Allowance limit is relieved in full in the year of purchase regardless of which pool it would otherwise sit in. It becomes more relevant for larger commercial fit-outs where total qualifying spending in the year exceeds that limit, since the excess is then written down annually rather than deducted in full straight away, and integral features are written down more slowly than general plant.

Common mistakes

• Claiming capital allowances on the whole building because part of it is commercial. The residential element never qualifies, however small a proportion of the building the commercial unit represents.
• Skipping the apportionment on shared costs. A single invoice for work touching both parts still needs to be split, even if that means going back to a contractor or surveyor for a reasonable breakdown after the event.
• Missing the Annual Investment Allowance timing. Because the allowance is given for the accounting period in which the expenditure falls, poor timing around a company's year end can needlessly delay relief that could otherwise have been claimed a year earlier.
• Forgetting to track allowances already claimed if the property is later sold. A buyer inheriting a mixed-use property with existing capital allowance pools has their own decisions to make about continuing or electing out of those pools, which is worth raising with an accountant before exchange rather than after.

How PropMaps helps

PropMaps lets you record income and costs by property and, where useful, by unit within a property, so a mixed-use building's commercial and residential elements can be tracked separately from day one, giving your accountant a clean starting point for any capital allowances claim rather than a single blended set of figures to unpick.

Disclaimer

This guide is general information for UK landlords, not tax or legal advice. Capital allowances rules are detailed and fact-specific. Check GOV.UK, HMRC's Capital Allowances Manual, or a qualified adviser before making a claim.