Property Transactions
Section 198 Election
A Section 198 Election refers to a joint statutory election made under the Capital Allowances Act 2001 that enables buyers and sellers of commercial property in the United Kingdom to fix the capital allowances value of embedded fixtures. Governed by HM Revenue and Customs (HMRC), this formal legal agreement prevents protracted negotiations by determining a precise, binding apportionment of the purchase price attributed to plant and machinery items such as electrical systems, heating, and ventilation. Without a valid Section 198 Election executed within the strict two-year statutory time limit following a property transfer, neither party can typically claim capital allowances on the fixtures, resulting in a permanent loss of valuable tax relief for commercial property investors and corporate owners.
Why it matters
A Section 198 Election matters because it directly dictates the transfer of millions of pounds in unclaimed capital allowances during commercial real estate transactions, safeguarding corporate cash flow and property yields. According to HMRC property transaction data, failure to execute this election is one of the leading causes of forfeited tax relief in the UK commercial property market, impacting asset acquisition returns. Under the mandatory pooling requirement introduced by the Finance Act 2012, if a seller fails to pool historical expenditure or if parties omit a Section 198 election, the entitlement to claim plant and machinery allowances on fixtures is extinguished forever across the entire ownership chain. For commercial property investors, securing a properly drafted Section 198 election ensures that tax depreciation benefits are legally transferred to the buyer without triggering clawbacks or costly retrospective valuation disputes. Corporate tax advisers use this mechanism to optimise transaction documentation, providing legal certainty and protecting property buyers from inheriting unexpected tax liabilities or losing valuable write-downs under modern regimes like full expensing.
The common misconception
Misconception: A Section 198 Election can be submitted to HMRC at any time after the property purchase completes as long as both parties agree. Reality: The election must be submitted to HMRC within two years of the date of the property transfer, and a copy must be formally included in the respective tax returns of both buyer and seller. Misconception: The total value allocated to fixtures in a Section 198 Election can exceed the overall purchase price of the commercial property or the original cost incurred by the seller. Reality: The allocated fixtures value is strictly capped at the actual purchase price of the property and cannot exceed the original acquisition cost incurred by the claimant or historical pooling limits. Misconception: Property buyers can claim capital allowances on fixtures automatically without a Section 198 Election if they have a standard commercial contract of sale. Reality: Since the introduction of mandatory pooling and fixed value requirements, a standard sale contract is insufficient unless a formal Section 198 or Section 199 election has been executed and filed within the statutory window.
A worked example
Consider a UK corporate investor acquiring a modern office building in Manchester for £10,000,000. During financial due diligence, a specialist capital allowances survey identifies £1,500,000 worth of qualifying plant and machinery fixtures, including air conditioning units, lighting systems, and sanitaryware embedded within the fabric of the building. To ensure the buyer can claim ongoing writing down allowances, the solicitors draft a Section 198 Election alongside the standard property transfer contract. Both the buyer and the selling corporate entity sign the election, explicitly fixing the value of the fixtures at £1,500,000. Because the seller had previously pooled these specific expenditures correctly under the Capital Allowances Act 2001, the statutory fixed value requirement is satisfied. Within the mandatory two-year window, the election is formally incorporated into both companies' tax computations submitted to HMRC. As a result, the buyer successfully secures the right to claim hundreds of thousands of pounds in tax depreciation, significantly enhancing the after-tax yield of the commercial acquisition, while the seller avoids any unexpected balancing adjustments.
Source: www.gov.uk