Capital allowances represent a significant mechanism for reducing the effective cost of commercial property investment. For the 2026/27 tax year, the rules surrounding mixed-use “shop and upper” assets in London require specific structural and timing considerations. This guide outlines the technical framework for claiming these allowances on properties comprising ground-floor retail and residential upper parts.
This article serves as a technical companion to our guides on Pension-Backed Property Investment and The Mechanics of Title Splitting.
Understanding the Three Expenditure Streams
In a mixed-use acquisition, total expenditure must be categorized into three distinct streams. Only specific streams qualify for capital allowances.
- Plant & Machinery (P&M): This includes “integral features” such as electrical systems, heating, lifts, and air conditioning. It also covers trade-specific fixtures like shop fittings and sanitary ware.
- Structures & Buildings Allowance (SBA): This relates to the physical shell and structural works of the commercial portion of the building.
- Land: The value attributable to the land itself. This does not qualify for any form of capital allowance.
For a shop and upper investor, the primary objective is to separate these costs accurately at the point of purchase or during refurbishment.
The Commercial-Residential Restriction
Capital allowances are strictly limited to the non-residential portions of a property. In a standard mixed-use configuration:
- Qualifying: The ground-floor shop, basement storage used for trade, and common areas (stairs, hallways) to the extent they serve the commercial unit.
- Excluded: The residential “upper” parts. Plant and machinery located within private flats (e.g., individual boilers, kitchens, bathrooms) do not qualify for capital allowances.
Structural works follow the same logic. SBA is only available on the portion of the build cost attributable to the commercial unit.
2026/27 Rates and Reliefs
The tax landscape for the current period includes several specific rates and thresholds that investors must factor into their financial modeling.
Annual Investment Allowance (AIA)
The AIA remains capped at £1 million per annum. This provides 100% first-year relief on qualifying plant and machinery. Most individual and corporate investors in the shop-and-upper space will find their entire P&M expenditure covered by this allowance, provided it falls within the commercial or common-part remit.
Full Expensing (Companies Only)
For corporate investors, “Full Expensing” allows for a 100% deduction on new (not second-hand) main-rate plant and machinery with no upper limit. This is particularly relevant for major refurbishments of retail units where the investor is buying new equipment and systems.
The 2026 First-Year Allowance (FYA)
From January 2026, a new 40% First-Year Allowance has been introduced for specific categories of commercial expenditure. This serves as an intermediate relief for assets that may not qualify for full expensing but exceed the AIA threshold in a single period.
Writing Down Allowances (WDA)
From April 2026, the main rate for Writing Down Allowances has been adjusted to 14%. Assets placed in the special rate pool (such as integral features like electrical or cooling systems) continue to attract a 6% WDA.
The Critical Section 198 Election
On the purchase of a second-hand property, the ability to claim capital allowances depends on the “pooling” requirement. To retain the benefit of allowances on fixtures already in the building, the buyer and seller must enter into a Section 198 election.
This election must be made within two years of the acquisition. It fixes the value of the fixtures for tax purposes. If the seller has not previously pooled the allowances, a “Capital Allowances Audit” should be conducted during the due diligence phase to identify unclaimed history. Failure to address this in the sale contract often results in the permanent loss of the right to claim on those specific assets.
Structures & Buildings Allowance (SBA)
The SBA provides relief for the construction, conversion, or renovation of the commercial element. For 2026/27, this is set at a 3% straight-line allowance over a 33.3-year period.
To claim SBA, the investor must hold an “Allowance Statement.” This is a document provided by the person who carried out the construction (or the previous owner) detailing the qualifying costs and the date the building first came into non-residential use.
Mixed-Use Apportionment Methodology
When acquiring a shop and upper for a single price, the cost must be apportioned. HMRC generally accepts a floor area basis for this split, provided it reflects the market value of the different components.
A typical London shop-and-upper might see 20% to 40% of the commercial fit-out or purchase price qualify as Plant & Machinery. Precise cost segregation surveys are required to ensure these figures withstand scrutiny.
Practical Implementation Steps
- Cost Segregation Survey: Engage a specialist at the point of acquisition or during the planning of a refurbishment. Standard accounting depreciation is not sufficient for HMRC compliance.
- Section 198 Negotiation: Ensure the sale and purchase agreement includes the necessary elections to protect the value of the fixtures.
- Historic Pooling Audit: Review the capital allowances history of the asset. Many London mixed-use properties have significant “unclaimed” value from previous owners.
- Common Part Analysis: Correctively identify shared systems (e.g., a main building lift or central fire alarm) to ensure the commercial portion of these costs is captured.
For further information on structuring these assets within a tax-compliant framework, refer to our Due Diligence Checklist or contact our strategic portfolio team.
