Capital Allowances on Commercial Solar: AIA vs Full Expensing

A rooftop solar array on your commercial building is plant and machinery in tax terms, and the way it qualifies for relief is more particular than most owners assume. The headline most installers quote — “100% tax relief in year one” — is true for many buyers, but only through a specific mechanism. It is not the same mechanism that delivers full expensing on a forklift or a server rack, and the distinction matters enormously if you are a landlord, an investment company, or anyone buying the asset to lease it on.

This post explains where solar sits in the capital allowances framework, why the Annual Investment Allowance is the route to 100% relief rather than full expensing, and the exclusions that catch property investors out. Tax treatment is fact-specific and the rules change. Treat this as a map of the terrain, not advice for your situation — take professional advice from a qualified accountant before you rely on any figure here.

Solar is special-rate plant, not main-pool

Capital allowances split qualifying plant and machinery into two pools. Most assets land in the main pool, which attracts an 18% writing-down allowance a year. A narrower category — “integral features” of a building — sits in the special rate pool at a slower 6% a year. Integral features include electrical systems, lighting, cold water systems, lifts, and heating.

Solar PV is classified as a special-rate asset. HMRC sets this out in its Capital Allowances Manual at CA22335: solar panels are treated as integral features and go into the special rate pool. This is not a penalty in itself, but it is the fact that drives everything else, because the two most generous reliefs — the Annual Investment Allowance and full expensing — treat special-rate assets very differently.

The Annual Investment Allowance: the 100% route for solar

The Annual Investment Allowance (AIA) gives 100% first-year relief on qualifying plant and machinery, including special-rate assets like solar, up to an annual limit of £1m. The £1m limit is now permanent. For the overwhelming majority of commercial rooftop installations this is the mechanism that delivers the “claim it all in year one” outcome.

Consider a 250kWp install at a worked cost of around £185,000 (ex VAT — commercial solar has been zero-rated since April 2022). That sits comfortably inside the £1m AIA ceiling. A profitable business can set the entire £185,000 against taxable profits in the year the expenditure is incurred. At 25% corporation tax that is roughly £46,000 of tax saved, brought forward to year one rather than dripped out at 6% a year over the better part of two decades.

The AIA is available to companies, sole traders, and partnerships of individuals, which is part of why it is the workhorse relief. The catch is the £1m annual cap shared across all your qualifying spend, and the timing — it relieves expenditure in the period incurred, so large portfolio rollouts need planning to avoid stacking spend into one window and breaching the limit.

Full expensing: why it only gives 50% on solar

Full expensing is the relief that often gets confused with the AIA. Since April 2023 it has allowed companies to claim 100% first-year relief on main-pool plant and machinery with no upper limit. That is genuinely uncapped — but it applies to main-pool assets.

For special-rate assets, including solar, full expensing does not give 100%. It gives the 50% First-Year Allowance instead. You write off half the cost in year one, and the remaining balance drops into the special rate pool to be relieved at 6% a year thereafter. On our £185,000 array, full expensing alone would relieve £92,500 in year one and then chip away at the rest slowly.

So for a company with headroom under the £1m AIA limit, the AIA beats full expensing on solar — 100% versus 50% in year one. Full expensing only becomes the relevant tool for solar spend that sits above the AIA ceiling in a given period.

The two key takeaways from the table: the AIA is the only route to 100% on solar, and full expensing is companies-only — sole traders and partnerships cannot use it at all.

The leasing exclusion: the trap for landlords

Here is the rule that most affects a commercial property owner. Full expressing and the 50% First-Year Allowance are both denied for plant and machinery bought to lease to someone else. If you acquire an asset for the purpose of leasing it on, you cannot use full expensing on it.

This matters because several of the ownership structures landlords use to put solar on a let building involve leasing the asset, or sit close enough to the leasing rule to be caught. If you install solar and the kit effectively serves a tenant under an arrangement that counts as leasing the plant, the first-year reliefs fall away.

What is left for the landlord in that position is still useful, but slower:

• The Annual Investment Allowance can still apply in many cases, giving 100% up to £1m — the AIA does not carry the same broad leasing exclusion that full expensing does, though the position depends on the exact structure and how the asset is used.
• Where neither first-year relief is available, the spend goes into the special rate pool at 6% writing-down allowance a year on a reducing balance.

The difference between a 100% year-one deduction and a 6% reducing-balance writedown is the difference between recovering your tax relief in one year and recovering it over roughly twenty. That is why the ownership and contractual structure is not a back-office detail — it shapes the after-tax return. If you are weighing a roof lease, a landlord-to-tenant PPA, or a licence to occupy the airspace, the capital allowances treatment should be modelled alongside the rent and the energy economics, not bolted on afterwards. Our roof lease vs PPA vs licence guide walks through how each structure sits against this.

Buying or selling a building with solar: the s.198 election

Capital allowances do not just matter at installation. When a commercial property changes hands, the allowances attached to fixtures — including a solar array — have to be dealt with between buyer and seller. The mechanism is a section 198 election under the Capital Allowances Act 2001, a jointly signed document that fixes the value attributed to the fixtures for allowances purposes.

Get this wrong and the allowances can be lost to both parties. If the fixtures value is not properly pooled and an election is not made within the time limit, a buyer can find they cannot claim allowances the seller had available — value that should transfer simply evaporates. On any acquisition or disposal of a building with solar, the s.198 position belongs on the due diligence checklist, with the figure agreed and the election signed as part of the transaction. Our owners’ due diligence guide covers where this fits in the wider checklist.

What this means in practice

Pulling it together for a commercial property owner:

• Solar is special-rate plant (HMRC CA22335), which sets the rules for which reliefs apply.
• The AIA is your route to 100% relief in year one, up to £1m — for most single installs this is the answer.
• Full expensing gives only 50% on solar and is companies-only, so it is a secondary tool used above the AIA ceiling, not the headline relief.
• The leasing exclusion denies the first-year reliefs on plant bought to lease, pushing some landlord structures back to AIA where available or 6% WDA — which makes the ownership structure a tax decision, not just a commercial one.
• On purchase or sale, sort the s.198 election so the allowances do not fall through the gap.

Capital allowances interact with how the project is financed, with any grant funding, and with VAT, so the numbers above are illustrative rather than a quote for your building. The detail of your structure — owner-occupier, landlord, investment vehicle, lease terms — changes the answer. Take professional advice from an accountant who has seen the specific arrangement before you commit. For a fuller treatment of how allowances combine with the rest of the funding picture, see our capital allowances and funding guide and the grants and funding overview.

If you want the allowances position modelled against the ownership structure for a specific building — so you can see which party claims what and over what period — request a quote and we will build the figures around your situation and your accountant’s input.