Capital Allowances & Funding for Owners

The single most common error on installer-written tax pages is treating commercial solar as if it qualifies for full expensing. It does not — at least not at 100%. Solar photovoltaic equipment is classified as a special-rate (integral features) asset by HMRC, and that classification changes which relief applies, how much of the cost you can write off in year one, and — critically for a landlord — whether you can claim the headline first-year reliefs at all. Getting this wrong overstates the after-tax return in a model, and an overstated return is how a deal gets signed and then disappoints. This guide sets out the position as it stands in June 2026, the leasing exclusion that catches almost every landlord and roof-lease structure, and the funding routes that pair with each ownership model. As with everything tax-related, treat this as an explanation of the framework, not advice on your own position: take professional advice, because the value of any allowance depends on your marginal tax rate and your wider profit position.

Why solar is “special rate”, and why that matters

Capital allowances let a business deduct the cost of qualifying plant and machinery from its taxable profits. Not all plant is treated the same. HMRC divides qualifying expenditure into two main pools — the main rate pool (18% writing-down allowance) and the special rate pool (6% writing-down allowance) — and solar PV sits firmly in the special-rate pool as an integral feature of a building. HMRC’s manual at CA22335 is explicit that “solar panels” are integral features and therefore special-rate expenditure.

That single classification has three knock-on effects:

• It determines the default writing-down rate: 6% a year on a reducing balance, not 18%. Without an accelerated relief, a £200,000 array would take well over a decade to fully relieve.
• It determines which first-year reliefs are available. Full expensing (100%) applies only to main-rate assets. The special-rate equivalent — the 50% First-Year Allowance — is the most a company can get under full-expensing rules on solar.
• It interacts with the fixtures rules when let property changes hands, which is where the s.198 election comes in (covered below).

The good news is that there is a route to 100% relief in year one — but it comes from a different allowance entirely.

The £1m Annual Investment Allowance is the real 100% route

For most commercial solar buyers, the Annual Investment Allowance (AIA) — not full expensing — is what delivers 100% relief in the first year. The AIA gives a 100% deduction on qualifying plant and machinery up to £1,000,000 of expenditure per year, and it applies to special-rate assets including solar. The £1m limit is now permanent. Because a typical commercial array — 50kWp at £35,000–£60,000, 250kWp at a worked £185,000, even 500kWp around £350,000–£500,000 — sits comfortably under £1m, the AIA usually relieves the entire cost in the year of installation.

Crucially, the AIA is open to companies, sole traders and partnerships alike. Full expensing and the 50% First-Year Allowance are restricted to companies within the charge to corporation tax; an owner trading as a sole trader or through a partnership cannot use them at all. For those owners, the AIA is the only route to accelerated relief — and it is more generous on solar than full expensing would be anyway.

A worked illustration on a 250kWp owner-occupier install at £185,000, assuming the expenditure is covered by the AIA:

The ~£46,250 figure assumes a 25% main rate and enough taxable profit to absorb the deduction. At the 19% small-profits rate the same deduction is worth ~£35,150; if profits are too low to use the full deduction the unused balance simply carries forward in the pool. This is the reason the standard caveat is not boilerplate: the allowance is worth your tax rate, not the headline cost.

Full expensing and the 50% FYA: what they actually give you on solar

Full expensing gives 100% on main-rate plant but only 50% on special-rate assets like solar — and it is companies-only. When a property installer’s brochure says “claim 100% in year one through full expensing,” that is correct for general plant and incorrect for solar. The relevant relief under the full-expensing regime for special-rate expenditure is the 50% First-Year Allowance: a company deducts 50% of the solar cost in year one, and the remaining 50% enters the special-rate pool to be written down at 6% a year thereafter.

For a company with profit to absorb it, the AIA (100%) is therefore strictly better than the 50% FYA on solar — so in practice the 50% FYA only becomes relevant if you have already exhausted the £1m AIA on other expenditure in the same year, which is rare for a single solar project.

The leasing exclusion: the trap that catches landlords

Here is the nuance almost no generalist page covers: full expensing and the 50% First-Year Allowance are not available for assets bought to lease to someone else. The first-year allowances under the full-expensing regime expressly exclude plant and machinery acquired for leasing. For a landlord installing solar to sell power to a tenant, for a developer funding a roof under a lease, or for any PPA or roof-lease structure where the asset earns its return by being made available to another party, the 50% FYA route is closed.

What remains for those structures:

• The AIA may still be available depending on how the arrangement is characterised — but the leasing exclusions in the capital-allowances code are detailed, and whether a given PPA or roof-lease counts as “leasing the plant” turns on the contract. This is precisely where professional advice earns its fee.
• Where no first-year allowance applies, relief falls back to the 6% writing-down allowance on the special-rate pool — slower, but still real. A £200,000 array relieved at 6% reducing balance gives roughly £12,000 of deduction in year one, tapering thereafter.

The practical takeaway: the ownership route you choose changes the tax outcome, not just the cash flows. An owner-occupier who installs solar for their own consumption is in the strongest position — the array is used in their own trade, the AIA is available, and 100% relief in year one is realistic. A landlord who funds an array specifically to lease its output is in a weaker capital-allowances position and should model on the 6% WDA basis unless their adviser confirms otherwise. We set the two situations side by side on the owner-occupied commercial property page and in the roof lease vs PPA vs licence comparison, because the right answer is structure-specific.

Quick reference: who can claim what on solar

The s.198 fixtures election when buying or selling let property

If you buy or sell commercial property that already has solar fitted, the capital allowances on that solar are not automatic — they hinge on a section 198 election. Solar PV is a fixture: once installed it forms part of the building. Under the fixtures rules, the buyer can only claim allowances on fixtures (including existing solar) if the value of those fixtures is fixed in a joint election under s.198 of the Capital Allowances Act 2001, agreed between buyer and seller and made within the statutory time limit (broadly two years of completion).

Get this right and the allowances pass cleanly to the new owner at an agreed value. Get it wrong — no election, or a missed deadline — and the buyer can lose the entitlement to those allowances entirely, which both reduces the asset’s after-tax appeal and can knock the price in negotiation. For an investor acquiring a let asset with an existing array, the s.198 election is a due-diligence item, not an afterthought; it belongs in the heads of terms. We cover it alongside the other transaction-layer items in owner’s due diligence.

Stacking the other incentives on top

Capital allowances are the largest single tax lever, but they are not the only one. A complete owner’s model stacks several reliefs and revenue streams:

• 0% VAT on the install. Commercial solar installations have been zero-rated for VAT since April 2022, so there is no VAT to finance or recover on the capital cost — a genuine cash-flow saving over the old 20% position.
• Business-rates exemption to 31 March 2035. In England, rooftop solar and co-located battery storage are 100% exempt from business rates until 31 March 2035. On a 250kW array that is roughly £3,000–£8,000 a year avoided. Note that under a full repairing and insuring (FRI) lease the rates payer is usually the occupier, so the benefit of the exemption may sit with the tenant rather than the landlord — worth flagging when you structure who funds the array.
• Smart Export Guarantee (SEG). Surplus electricity exported to the grid earns a supplier-set SEG rate — best agnostic fixed tariffs are around 12–15p/kWh (Octopus Outgoing Fixed at 12p, Good Energy at 15p). SEG is a top-up on surplus, not the headline return; self-consumption at 24–28p/kWh is always worth more than export.
• REGOs. Renewable Energy Guarantees of Origin certificates trade at around £15/MWh as a separate stream. Up to 50kW you evidence generation via the MCS certificate; above that you register with Ofgem.

None of these is a capital allowance, but together they shorten payback by months and improve the after-tax position. The full build-up of cost, payback and these stacked incentives sits on the cost page and the grants and funding overview.

Funding routes, and how each interacts with the tax position

How you pay for the array shapes both the tax claim and the balance sheet. Three broad routes:

Capital purchase

You buy the array outright from cash or facilities. This is the cleanest position for capital allowances — you own the asset, you use it (or it is used in your business), and the AIA is generally available to deliver 100% relief in year one. It carries the full economics and the strongest return, which is why owner-occupiers almost always buy outright where capital permits.

Asset finance / leasing

You spread the cost through an operating lease, hire purchase or asset-finance facility. The accounting and tax treatment depends on the type of agreement: under hire purchase you are usually treated as the owner for capital-allowances purposes and may claim the AIA; under an operating lease the funder owns the asset and you deduct the lease rentals as a revenue expense instead. The trade-off is preserved cash and a predictable monthly cost against a slightly lower headline return once finance cost is included. This route suits owners who want to keep capital free for the core business while still capturing the consumption savings.

Third-party roof lease or PPA

A developer funds and owns the array; you take rent (roof lease) or buy discounted power (PPA) with no upfront capital. The capital allowances sit with the developer, not you — which is exactly the leasing situation discussed above. For the owner the attraction is zero capex and no asset on the balance sheet; the cost is a smaller share of the long-run economics and a registrable interest over the roof with its own legal and lender consequences. The full comparison, including the SDLT and mortgagee-consent angles, is in roof lease vs PPA vs licence.

The right route depends on your tax position, your cost of capital, and whether you occupy or let the building. There is no universally best answer — only the best answer for a specific owner and a specific asset. When you are ready to model your own numbers, the quickest start is a quote with the consumption and ownership details that drive the allowance claim.

Frequently asked questions

Does commercial solar qualify for full expensing?

Not at 100%. Solar PV is a special-rate (integral features) asset under HMRC’s classification at CA22335, and full expensing only gives 100% relief on main-rate plant. On solar, the full-expensing regime gives a 50% First-Year Allowance, with the remaining 50% written down at 6% a year. For most buyers the better route is the £1m Annual Investment Allowance, which gives 100% relief in year one and is open to sole traders and partnerships as well as companies. Take professional advice on your own position, because the value depends on your tax rate.

Can a landlord claim 100% capital allowances on solar?

Usually not through the first-year allowances. Full expensing and the 50% First-Year Allowance are not available for plant bought to lease to another party, which catches landlords installing solar to sell power to a tenant and developers funding roof-lease structures. Whether the £1m Annual Investment Allowance is available depends on how the specific arrangement is characterised, so this is a point to confirm with an adviser. Where no first-year allowance applies, relief falls back to the 6% writing-down allowance on the special-rate pool — slower, but still a genuine deduction. An owner-occupier consuming the power in their own trade is in a far stronger position; see owner-occupied commercial property.

What is a section 198 election and when do I need one?

A section 198 election fixes the agreed value of fixtures — including existing solar — when commercial property is bought or sold, so the buyer can claim capital allowances on those fixtures. Solar is a fixture, so without a valid s.198 election (made jointly by buyer and seller, broadly within two years of completion) the buyer can lose entitlement to the allowances on the array entirely. If you are acquiring or disposing of a let property with an existing array, treat the s.198 election as a due-diligence item in the heads of terms. It is covered alongside the other transaction-layer points in owner’s due diligence.

How do the other incentives stack with capital allowances?

They stack on top and shorten payback rather than replacing the allowance. A commercial install is zero-rated for VAT (since April 2022), so there is no VAT to finance. Rooftop solar and co-located battery storage are 100% exempt from business rates in England until 31 March 2035 — roughly £3,000–£8,000 a year on a 250kW array, though under an FRI lease that benefit usually sits with the occupier. Exported surplus earns a supplier-set Smart Export Guarantee rate of around 12–15p/kWh, and REGO certificates trade separately at around £15/MWh. The cost and payback build-up combining all of these is on the cost page and the grants and funding overview. As always, model on your own tax rate and take professional advice before committing.