What Is a Section 198 Election?
Section 198 of the Capital Allowances Act 2001 provides a mechanism for allocating capital allowances between a buyer and seller in property transactions. It allows the parties to agree how unclaimed allowances should be split.
The election must be made within 2 years of the property sale and is binding on both parties.
When Does Section 198 Apply?
A Section 198 election is relevant when:
- A commercial property is sold
- The seller had unclaimed capital allowances attached to the property
- The buyer wishes to claim those allowances
What Can Be Allocated?
Through a Section 198 election, the parties can:
- Transfer all unclaimed allowances to the buyer
- Split the allowances between buyer and seller
- Leave allowances with the seller (though this is rare)
The Critical Clarification: What It Does NOT Apply To
This is where many accountants go wrong. A Section 198 election is only relevant to property purchases where there is a seller to make an election with.
Section 198 Does NOT Apply To:
- Leasehold Improvements — Where a tenant has funded improvements to a rented property. There is no "seller" — the tenant owns the embedded allowances.
- Renovation or Conversion Costs — Where a property owner has renovated or converted a building. The allowances belong to them alone.
- New Build Construction — Where the property was constructed by the owner. Again, no seller exists.
Key Point: In these scenarios, there is no Section 198 election to make. The person who incurred the expenditure owns 100% of the allowances.
Practical Implications
When advising clients on property transactions:
- For buyers: Check if the seller has unclaimed allowances and negotiate accordingly
- For sellers: Consider whether to retain or transfer allowances to maximise value
- For leasehold improvements: Don't wait for a Section 198 election — it doesn't apply
Common Mistakes to Avoid
- Assuming Section 198 applies to all property transactions
- Waiting for a seller to make an election on leasehold improvements
- Failing to identify unclaimed allowances before a property sale
- Missing the 2-year deadline for making an election
Related Topics
- Understanding Embedded Allowances
- Making Retrospective Claims — Claiming for past expenditure
- Talking to Clients About Tax Savings — Starting the conversation
- Back to Accountant's Guide