A section 266 election lets a business that passes to a connected successor, such as a sole trader’s own new company, transfer its plant and machinery at tax written down value, so the old owner suffers no balancing charge and the successor simply carries on claiming allowances on the same pool. Both parties must sign it, and it must reach HMRC within two years after the date the succession takes effect.
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What problem does the election solve?
When one person takes over a qualifying activity from another, the old owner’s activity is permanently discontinued and every pool reaches its final chargeable period (see capital allowances in the final year of a business). Without an election, section 265 of the Capital Allowances Act 2001 (CAA 2001) treats any property used in the old business and used straight away in the new one as sold to the successor at market value. HMRC’s Capital Allowances Manual at CA29030 confirms the successor can then claim writing down allowances but not first year allowances, and section 265(4) blocks the annual investment allowance too.
Where market value exceeds the tax written down value, which is common after years of AIA claims, the predecessor faces a balancing charge in its final period even though nothing has really changed hands outside the family. Section 266 exists to avoid that.
Who counts as connected for section 266?
Section 266(5) gives its own wider test. The predecessor and successor are connected if any of these applies:
- they are connected persons under section 575 CAA 2001;
- one is a partnership and the other has a right to a share in that partnership;
- one is a body corporate and the other has control over it;
- both are partnerships and another person has a right to a share in both;
- both are bodies corporate, or one is a partnership and the other a body corporate, and another person controls both.
A right to a share in a partnership means a right to a share of its assets or income (section 266(6)). HMRC summarises the effect at CA29040: an election is possible where the parties are connected in the ordinary sense, where there is common control, or in partnership cases where there is at least one person in common. The typical uses are a sole trader or partnership incorporating, a business moving between two companies under the same control, and a trade passing from a company to its controlling shareholder.
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What other conditions apply?
- Each party must be within the charge to UK tax on the profits of the qualifying activity (section 266(1)(b)).
- The successor must not be a dual resident investing company (section 266(1)(c)).
- The election is not available where section 561 applies (transfer or division of a UK business) (section 266(8)).
- HMRC states at CA29040 that it cannot be made where the activity is special leasing, and section 267A limits its effect on leased plant when a leasing business is transferred between companies.
- It works only for a succession to the qualifying activity itself. A partnership where at least one partner carries on before and after the change is not a succession at all; section 263 already treats the activity as continuing.
Section 266(3) allows the election whether or not any plant or machinery has actually been sold or transferred, so it can be made even where the assets pass informally as part of the business.
What does the election actually do?
Section 267(2) treats each item of relevant plant or machinery as sold by the predecessor to the successor when the succession takes place at a price that gives neither a balancing allowance nor a balancing charge. In a pool, HMRC says this means the assets pass at the pool value. Any actual price paid is ignored.
Section 267(4) then makes the successor stand in the predecessor’s shoes: allowances and charges are made as if everything done by the predecessor had been done by the successor. CA29040 explains that this means the successor is treated as having acquired the assets at the same time and price as the predecessor, so a later disposal value is capped by the predecessor’s original cost, not the transfer price. While the election is in force, section 266(7) switches off the general succession rule in section 265 and the special rate anti avoidance rule in section 104E.
Only “relevant” plant passes this way: under section 267(3) it must have been owned and used in the activity by the predecessor immediately before, and owned by and used in the activity by the successor immediately after. An asset the old owner keeps, such as a car taken out of the business, is not covered and is brought into the predecessor’s final period at market value.
When and how must the election be made?
Section 266(2) requires the predecessor and successor to elect jointly, and section 266(4) requires the election to be made by notice to an officer of Revenue and Customs within two years after the date on which the succession takes effect. There is no extension mechanism written into section 266, so the date of the succession should be pinned down and the deadline diarised as soon as the transfer happens. In practice the notice should identify both parties and their tax references, state the date of succession, cite section 266 CAA 2001 and be signed on behalf of each party, with a copy kept on both files.
If any of the assets are fixtures in a building, CA29040 notes that for successions from 1 April 2012 (corporation tax) or 6 April 2012 (income tax) a joint section 198 fixtures election is also needed for the successor to claim allowances on them, and the amount fixed under section 198 cannot exceed the amount under section 266.
How does it work on incorporation?
Illustration only. Sam has traded as a sole trader for several years. On 1 June 2026 the trade and all its equipment pass to Sam Ltd, which Sam controls. The equipment originally cost £70,000, the main pool stands at £40,000 and the equipment is worth £55,000.
| Without an election | With a section 266 election | |
|---|---|---|
| Sam’s disposal value in the final period | £55,000 (market value) | £40,000 (pool value) |
| Sam’s balancing charge | £15,000 | Nil |
| Sam Ltd’s opening pool | £55,000 | £40,000 |
| AIA or first year allowance for Sam Ltd | None (section 265(4)) | None |
| Sam Ltd’s writing down allowance, year to 31 May 2027 at 14% | £7,700 | £5,600 |
Without the election Sam is taxed on a £15,000 balancing charge, treated as a trading receipt under section 247, in his last year, while the company gains only a slightly faster write off. With it, the income tax charge disappears and the company carries on writing the pool down. Sam gets no writing down allowance in his own final period either way, because section 55(4) gives none in a final chargeable period. Other aspects of incorporating, including incorporation relief for capital gains and the first Corporation Tax return, run alongside this.
The election is not always the better choice. If market value is below the pool, the predecessor might prefer the balancing allowance that section 265 produces, for example to set against high profits in the final period. Section 266 is optional, so the figures should be run both ways.
What mistakes come up most often?
- Missing the two year deadline because the accountant for the new company is not the accountant for the old business.
- Assuming the successor can claim the AIA or full expensing on assets taken over. It cannot; with the election the assets simply join its pool at written down value.
- Including assets the predecessor keeps. They fall outside section 267(3) and need their own market value disposal.
- Forgetting the separate section 198 election for fixtures.
- Using section 266 for a partnership change where a partner continues. Section 263 already provides continuity and no election is needed; see capital allowances in a partnership.
- Expecting the successor to claim a higher figure later. Disposal values are capped by the predecessor’s original cost.
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Related Accountapedia entries
- Connected Persons and Capital Gains Tax
- Clogged losses on disposals to connected persons
- Late paid interest between connected parties
- Transfers between charity funds
- SDLT on transfers between spouses and on divorce
Sources
- legislation.gov.uk: Act 2001 c. 2, section 265
- GOV.UK: Manual page CA29030
- legislation.gov.uk: Act 2001 c. 2, section 266
- GOV.UK: Manual page CA29040
- legislation.gov.uk: Act 2001 c. 2, section 267
- legislation.gov.uk: Act 2001 c. 2, section 267A
- legislation.gov.uk: Act 2001 c. 2, section 263
- legislation.gov.uk: Act 2001 c. 2, section 247
- legislation.gov.uk: Act 2001 c. 2, section 55
- legislation.gov.uk: Act 2001 c. 2, section 56
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.