HMRC's Capital Allowances Manual at CA23195A says the allowance is available to persons within the charge to Corporation Tax or Income Tax. That covers: sole traders and partnerships of individuals, who cannot claim full expensing; companies, including those that cannot use full expensing because the plant is for leasing; mixed partnerships, which CA23195A says can claim for both corporate and non corporate members. Mixed partnerships are a group that gains most. CA11145 confirms a partnership with a company member is not a qualifying person for the AIA, so before 2026 its individual members had only writing down allowances on main rate plant. They can now take 40% in the first period.

The 40% first year allowance from 2026

The 40% first year allowance gives an upfront deduction of 40% of the cost of new and unused main rate plant and machinery bought on or after 1 January 2026. Unlike full expensing, it is open to sole traders, partnerships and companies alike, and it can be claimed on plant bought for leasing to UK users. The remaining 60% goes into the main pool in the following period.

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Where does the 40% allowance come from?

Finance Act 2026 section 29 inserted sections 45U and 45V into the Capital Allowances Act 2001 (CAA 2001) and added a 40% entry to the table in section 52. Legislation.gov.uk records the insertion as having effect from 18 March 2026, and the allowance applies to expenditure incurred on or after 1 January 2026. HMRC’s policy paper, published at Budget 2025 on 26 November 2025, describes it as a permanent allowance aimed at investment where full expensing and the annual investment allowance (AIA) are not available, naming assets bought for leasing and purchases by unincorporated businesses.

The same Act cut the main rate of writing down allowance from 18% to 14%, so the 40% allowance partly offsets slower relief on the main pool. That change is covered in capital allowance writing down rates. Our earlier overview of the 40% first year allowance sets out the headline rules; this page concentrates on who can claim and how the leasing rules work.

Who can claim it?

HMRC’s Capital Allowances Manual at CA23195A says the allowance is available to persons within the charge to Corporation Tax or Income Tax. That covers:

sole traders and partnerships of individuals, who cannot claim full expensing;
companies, including those that cannot use full expensing because the plant is for leasing;
mixed partnerships, which CA23195A says can claim for both corporate and non corporate members.

Mixed partnerships are a group that gains most. CA11145 confirms a partnership with a company member is not a qualifying person for the AIA, so before 2026 its individual members had only writing down allowances on main rate plant. They can now take 40% in the first period.

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Which expenditure qualifies?

Section 45U sets four conditions. The expenditure must:

be incurred on or after 1 January 2026;
not be special rate expenditure;
be on plant or machinery that is unused and not second hand; and
not be excluded by section 45V (disqualifying arrangements) or the general exclusions in section 46.

The date is the date actually incurred. CA23195A says the rule in section 12 that treats pre trading spending as incurred on the first day of trading is ignored for this test. Limited use for testing, delivery or demonstration does not make plant used, following the guidance at CA23174AB.

Special rate items such as integral features, long life assets and thermal insulation are outside the allowance. A company can use the 50% allowance on those instead, explained in the 50% first year allowance for special rate assets; an unincorporated business must rely on the AIA or the 6% special rate pool. Cars are excluded by general exclusion 2, so a van qualifies but a car does not; see capital allowances on cars. The general exclusions also remove spending in the period the activity permanently ceases and plant that is a gift or was first acquired for another purpose.

How does it work for plant bought for leasing?

CA23195B explains that plant provided for leasing is excluded from all the other first year allowances by general exclusion 6, which also treats hiring and ship chartering as leasing. Section 46(4B) disapplies that exclusion for the 40% allowance in two cases:

the plant is leased to a lessee for use wholly or almost wholly to earn income within the charge to UK tax; or
the lessee is UK resident and the plant is not used, to a significant extent, to earn income from a source outside the UK that is outside the charge to tax.

Every sub lessee must also meet one of the tests (section 46(4F) and (4G)). Income is treated as outside the charge to tax if double taxation or unilateral relief is available on it, and the lessor must presume the lessee has made every claim or election it could, unless the contrary is shown (section 46(4C) and (4E)). HMRC’s shorthand for the leasing that fails is overseas leasing (CA23195B).

CA23195C sets out what HMRC expects of lessors:

carry out checks, keep records of them and produce them on request;
a contract term prohibiting non qualifying use, or a lessee confirmation, is normally enough unless there is reason to suspect otherwise;
where sub leasing is not contractually prohibited, be ready to give details of all lessees and their use, or expect the claim to be refused;
cross hire between hire businesses does not stop a claim.

Insignificant overseas use is accepted. HMRC suggests, as an illustration only, that use for under 5% of the available time and under 5% of the rental income may be insignificant. Taking a leased asset abroad is not fatal: a lorry leased to a UK logistics business still qualifies if it is driven outside the UK, as does a van hired to a UK individual moving belongings to France.

How does it fit with the AIA and full expensing?

Where expenditure qualifies for more than one allowance, the business chooses (CA23084). In practice:

an unincorporated business will normally use its £1 million annual investment allowance first, which gives 100%, and claim 40% on main rate spending above the limit;
a company buying plant for its own use will normally prefer full expensing at 100%;
a company leasing plant to customers cannot use full expensing, so it uses its AIA share and then 40%.

Section 52(4) allows a claim on part of the cost. CA23110 explains that any part not claimed can go into the pool in the same period, while the unrelieved 60% of the part claimed waits until the next period.

What does a claim look like?

Illustration only. A sole trader runs a plant hire business with a 5 April year end. In the year to 5 April 2027 he buys new excavators costing £1.3 million, all main rate plant hired to UK contractors.

Item	2026 to 2027	2027 to 2028
AIA	£1,000,000	None
40% allowance on £300,000	£120,000	None
Balance added to main pool	Not yet	£180,000
Writing down allowance at 14%	None on this spend	£25,200

The pattern of a 40% claim followed by pooling the 60% in the next period follows HMRC’s own example at CA23110, in which a van bought for leasing for £100,000 gets £40,000 in the first period and £60,000 is pooled in the next.

What happens on a sale or a change of use?

CA23195F says the special balancing charge rules for full expensing do not apply. On disposal, the normal pooling rules apply, so the disposal value is deducted from the main pool. If the 60% balance has not yet been pooled, CA23110 requires it to be pooled no later than the disposal period. A short life asset election can still be made, though lessors need to check the leasing restrictions in section 84.

If plant validly claimed for UK leasing is later leased overseas, CA23195F says there is no clawback and no deemed disposal, but HMRC will consider the anti avoidance rule. Where hire purchase or long funding lease rules make someone other than the legal owner the owner for capital allowances, that person can claim if the conditions are met; see hire purchase versus leasing.

What mistakes and risks should be watched?

Claiming 40% on integral features or other special rate items, which are excluded.
Claiming on cars, or on second hand plant.
Pooling the 60% balance in the year of purchase.
Claiming on spending incurred before 1 January 2026. The date is fixed by the normal rules on when expenditure is incurred, such as section 5 (CA23195A).
Lessors without records of lessee checks. HMRC can refuse the claim where sub leasing details are not provided.
Section 45V denies the allowance where a main purpose of arrangements is to obtain it and they are contrived, abnormal or exploit shortcomings in the Act. HMRC says at CA23195E that it gives no clearances on this rule.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.