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Capital Allowances Explained

Capital Allowances Explained

Capital gains tax allowance, commonly known as CGT, allows taxpayers to obtain tax relief on capital expenditures. Capital allowances allow you to deduct most, or all, of the value of an item from your profits before paying tax.

It’s possible to claim capital allowance on business vehicles, such as lorries and vans, as well as machinery and equipment.

Sole traders with a taxable income of £150,000 or less per year are entitled to use a simpler system of capital allowance, known as cash basis. It can be hard to get to grips with tax payments in general, especially when you’re operating a business.

To find out more information about capital allowances, continue reading.


What are Capital Allowances?

What are capital allowances? Capital allowances are a type of tax that’s deductible from your expenses. These allowances are available on the provision of specific business assets that are in use for the purpose of trade.

If you’re a basic rate taxpayer, how much you’ll pay in CGT depends on the size of your gains. After working out your total taxable gains and deducting your tax-free allowance, you can use this amount to see if it’s within a certain income tax band.

The rate of CGT is either 10% or 18% for basic-rate taxpayers compared to higher-rate taxpayers.

If you and your spouse or civil partner reside together, any transfer of assets between you is treated as giving rise to neither a gain nor loss to whoever is transferring it. GOV.UK provides information regarding capital allowances.

Effectively, capital allowances allow taxpayers to write off the total cost of an asset over a certain period of time. There are many benefits that come with claiming capital allowances. Let’s take a look at the most advantageous factors of making a claim.


  • Reduce tax liability
  • Improve cash flow
  • Keep cash in your business
  • Gain a repayment of taxes
  • Possible cash refunds
  • Claim immediate tax and cash benefits


If you’ve recently bought a property or incurred capital expenditure on plant and machinery that’s being used for your business, the chances of you making a successful claim are high.

To make sure you’re eligible, a Tax Depreciation Group could carry out an assessment of your capital expenditure.


The Different Types of Capital Allowances for Plant and Machinery

The amounts you can claim varies depending on which capital allowance you’ve decided to use. There are a few capital allowances that you should educate yourself about before going ahead and choosing one.


  • Annual investment allowance allows you to claim up to £1 million on a selection of plant and machinery. This type of allowance is commonly known as AIA. Item value can be deducted from your profits before tax if it qualifies for AIA. This deduction can be for the full value. If you sell an item after claiming AIA, there’s a chance that you’ll need to pay tax rates.


  • 100% first-year allowances let you claim the full amount back on certain plant and machinery within the first year it was bought. You’ll be able to claim 100% first-year allowances in addition to AIA – but only if you don’t attempt to claim both for the same expenditure.


  • Writing down allowances can be claimed if your plant and machinery fail to qualify for AIA. Essentially, writing down allowances is one type of capital allowance. Writing down allowances lets you deduct a percentage from the value of items from your profits per year.


As well as plant and machinery, you’re also able to claim capital allowances for renovating business premises in disadvantaged areas of the UK, extracting minerals, dredging allowances, structures and buildings, intellectual property, research and development.


How LJS Accounting Services Can Help

LJS Accounting Services are expert tax advisers, offering a wide range of services from Expert Start-Up Advice to Accounts.

Our team has a wealth of knowledge and experience within the industry – 12 years to be exact. Our professional service is available for all individuals, whether you’re the owner of a limited company or a sole trader.

We build close-knit relationships with our clients, who work in a field of sectors ranging from construction to manufacturing.

Dealing with tax payments can be difficult, especially if you’re just getting to grips. Based in three locations in the North West, we encourage potential clients to visit us to talk further.

Our hard work, ambition and commitment to accounting don’t go unnoticed. We’ve obtained a well-respected status since opening our doors over a decade ago. Our extensive five-star reviews and positive client feedback are proof that we deliver excellent services.

Would you like to learn more about our services? Contact a member of our team by calling us on 0151 601 0000.

We can also be reached via email at info@ljsaccountingservcies.com. We look forward to hearing from you in the near future.

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