Dual national US UK: UK Capital Allowances vs US Depreciation

A Dual national US UK owner of UK commercial property claims plant and machinery allowances plus the 3% structures and buildings allowance on the UK return, while the US return permits only straight-line depreciation of the entire building over a 40-year foreign recovery period. Two reliefs, two clocks, two pools of expenditure — and a materially different gain on eventual sale.

That sentence is the whole problem in miniature, and it is the reason a single warehouse in Leeds or an office floor in Bristol generates two profit figures that will never agree in any year of ownership. At Jungle Tax we prepare both returns for the same asset, and the reconciliation work is where almost all of the risk sits. Generalist UK capital allowances specialists model the HMRC side beautifully and ignore the Internal Revenue Code entirely; US expat preparers apply a 40-year straight line to the purchase price and never ask what the section 198 election said. Neither approach survives an enquiry, and neither produces a correct gain on exit.

Why one building produces two irreconcilable sets of numbers

The United Kingdom does not allow a deduction for accounting depreciation. Commercial depreciation charged in the accounts is added back, and statutory capital allowances are substituted in its place under the Capital Allowances Act 2001. Those allowances attach to defined categories of expenditure — qualifying plant and machinery, integral features, and separately the structure itself — each running on its own rate and its own timetable.

The United States takes the opposite structural approach. The building is one depreciable asset with one basis, recovered by a single mechanical formula. Where the property is used predominantly outside the United States, the Internal Revenue Code removes every accelerator: no first-year expensing, no bonus, no declining balance. What remains is the Alternative Depreciation System — straight line, mid-month convention, 40 years for nonresidential real property.

So on the UK side you may be relieving 40% or even 100% of a chiller plant replacement in the year you incur it. On the US side that same chiller, as a component of a foreign building, is being recovered at roughly two and a half percent a year for four decades. The divergence is not an error to be fixed. It is the correct answer in both jurisdictions, and the preparation job is to carry two parallel schedules honestly and reconcile them at the points where they touch: the foreign tax credit each year, and the gain on disposal.

What does the UK return actually claim in 2026?

Capital allowances on commercial property are not a single relief. They are four distinct streams of expenditure, and a competent claim separates them before any rate is applied.

The four pools of expenditure

• Main pool plant and machinery — loose and fixed plant that is not an integral feature: security systems, signage, sanitaryware, fitted furniture, specialist trade plant, IT infrastructure.
• Special rate pool (integral features) — electrical systems and general lighting, cold water systems, space and water heating, powered ventilation and air conditioning, lifts and escalators, external solar shading, plus thermal insulation and most long-life assets.
• Structures and buildings allowance (SBA) — the construction cost of the structure itself: walls, floors, roofs, doors, groundworks, and the professional fees attributable to them.
• Non-qualifying expenditure — land, and anything that fails both the plant test and the SBA conditions. This bucket is larger than most owners expect, and it is the one the US return does not recognise as a separate category at all.

Rates that moved in 2026

The 2026 position is materially different from the one described on most UK capital allowances pages still circulating, and we see returns prepared on stale rates every season. HMRC's own guidance at CA23220 in the Capital Allowances Manual sets out the writing down allowance rates and the date of the change.

Relief	Position for 2026	Available to an individual landlord?
Annual Investment Allowance	100% on the first £1,000,000 of qualifying plant and integral feature expenditure	Yes
New 40% first-year allowance	40% in year one on qualifying main-pool expenditure incurred from 1 January 2026, balance to writing down allowances thereafter	Yes, including unincorporated businesses
Full expensing	100% first-year relief on qualifying new main-rate plant	No — companies within the charge to corporation tax only
Main pool writing down allowance	Reduced to 14% reducing balance from 1 April 2026 (corporation tax) / 6 April 2026 (income tax), from 18%	Yes
Special rate pool writing down allowance	6% reducing balance	Yes
Structures and buildings allowance	3% straight line over 33⅓ years	Yes

Two consequences follow immediately for a dual filer. First, the corporate-only reliefs are irrelevant to the very common structure where a US person holds UK commercial property personally or through a transparent partnership — a point almost every UK-only guide glosses over because it assumes a corporate reader. Second, a chargeable period straddling the April 2026 change takes a hybrid writing down rate apportioned across the period, which must be computed before you can populate the US foreign tax credit workings for that year.

The structures and buildings allowance is the closest UK analogue — and it still does not match

SBA looks superficially like US real property depreciation: straight line, long life, structure only. The general conditions are set out by HMRC at CA90100. The differences that matter in practice are these:

• SBA requires construction contracts entered into on or after 29 October 2018. Buy a Victorian mill and there is no SBA on the original structure at all — only on qualifying post-2018 construction or renovation. The US 40-year clock, by contrast, starts when you place the property in service, regardless of when it was built.
• SBA runs for 33⅓ years; ADS for nonresidential foreign real property runs for 40. The two schedules are permanently out of step.
• SBA is strictly annual. Relief not claimed in a chargeable period is lost permanently — it does not roll into a pool and it cannot be caught up later. This single rule is the most expensive feature of the entire regime for anyone with unfiled or under-claimed UK years.
• An allowance statement is a statutory precondition. No statement, no claim — and on a later sale the buyer inherits the seller's remaining SBA period, not a fresh one.
• SBA excludes land, and it excludes anything already relieved as plant. The US basis includes the structure and the fixtures together as one number.

Does the fixtures election decide what the UK side may claim at all?

Yes — and this is the most commonly destroyed relief in the whole exercise. For second-hand commercial property, two statutory gates stand between the buyer and any plant and machinery allowances on embedded fixtures.

Gate one: the pooling requirement

The seller must have allocated its qualifying fixtures expenditure to a capital allowances pool before the sale. If the seller never pooled — because it was a pension fund, a charity, a non-taxpayer, or simply badly advised — the buyer's entitlement to those fixtures is extinguished permanently, for that buyer and every buyer after it. No later claim, no retrospective repair.

Gate two: the fixed value requirement and the section 198 election

Where the seller did pool, the parties must fix the transfer value of the fixtures by a joint written election under section 198 CAA 2001, generally within two years of completion. The election binds both sides: the figure elected is simultaneously the seller's disposal value and the buyer's qualifying expenditure. It can be as low as £1 or as high as the seller's original cost, and it is a negotiated commercial term, not an accounting fact.

For a dual filer this creates a peculiar asymmetry that no purely domestic adviser will flag. A section 198 election at a nominal £1 wipes out the UK fixtures claim entirely — but it changes nothing whatsoever on the US return, where the full purchase price less land still enters basis and still depreciates over 40 years. The UK relief was negotiated away; the US relief was never negotiable. If the sale and purchase agreement is still in draft, that is a cross-border point worth raising before signature, and it belongs in the same conversation as the rest of your cross-border tax planning.

What does the US return allow on the same building?

Why the Alternative Depreciation System is mandatory

Tangible property used predominantly outside the United States must be depreciated under ADS. There is no election, no exception for treaty countries, and no relevance to the fact that HMRC has already granted faster relief. The mechanics, set out in IRS Publication 946, are:

• Method: straight line, always.
• Recovery period: 40 years for nonresidential real property. Foreign residential rental placed in service after 2017 uses 30 years; property placed in service before 2018 remains on 40. Commercial property is 40 throughout.
• Convention: mid-month for real property, so the placed-in-service month determines the first and final year fractions.
• Basis: purchase price plus capitalised acquisition costs and capital improvements, less the land component. Land is never depreciable in either system, but note that UK conveyancing rarely apportions land value explicitly, so the split must be evidenced separately for US purposes.
• Currency: basis is fixed in US dollars using the exchange rate at the date each cost is paid or incurred, and is not retranslated afterwards.

No bonus depreciation and no section 179 — even in 2026

This is the live misconception of the current filing season. One hundred percent bonus depreciation is again available for qualifying US property, and clients read that headline and assume it applies to their Manchester industrial unit. It does not. Bonus depreciation is unavailable for property required to be depreciated under ADS, and foreign-use property is squarely within that exclusion. Section 179 expensing is likewise denied for property used predominantly outside the United States.

The practical result is stark: in the same tax year, the UK return can deliver 100% relief on a £400,000 plant replacement through the Annual Investment Allowance while the US return delivers roughly 2.5% of the dollar-converted equivalent. That single-year spread is what drives an excess foreign tax credit position, and it is entirely predictable if you model it.

Does cost segregation still help on a UK property?

It helps, but far less than on a domestic US asset, and the analysis has to be re-run against ADS class lives rather than the familiar 5, 7 and 15-year general system buckets. Components properly classified as tangible personal property or land improvements still recover faster than 40 years under their own ADS periods, and the classification work overlaps substantially with the UK fixtures survey you may already have commissioned. Where a specialist has produced a capital allowances report for the section 198 negotiation, that report is a legitimate evidential starting point for the US component analysis — provided it is re-mapped to US definitions rather than adopted wholesale. UK integral features and US tangible personal property are not the same set.

US versus UK: the relief compared side by side

Feature	UK (HMRC)	US (IRS)
Relief on the building structure	SBA only, 3% straight line, and only for post-October 2018 construction	Full depreciable basis less land, straight line over 40 years, regardless of build date
Relief on fixtures and plant	Separate pools at 14% / 6% reducing balance, with AIA and first-year allowances available	No separate building-fixture relief; only a cost segregation analysis into ADS class lives
First-year acceleration	AIA to £1m, new 40% FYA, full expensing for companies	None — bonus depreciation and section 179 both denied for foreign-use property
Depends on a negotiated election?	Yes — section 198 fixes the fixtures figure and can reduce it to £1	No — basis is determined by cost, not by agreement with the seller
Relief unclaimed in a year	Pool WDAs survive and carry forward; SBA is lost permanently; AIA and FYA are lost for that expenditure	Reduces basis whether or not claimed — "allowed or allowable"
Functional currency	Sterling throughout	US dollars, fixed at historic rates per cost item
Tax year	6 April to 5 April for individuals	Calendar year
On sale	Balancing charge on pools; SBA claimed is added back through the capital gains computation	Unrecaptured section 1250 gain taxed at up to 25%; section 1245 recapture at ordinary rates on personal property components

The currency layer nobody models

Because the UK pools are maintained in sterling and the US basis is fixed in dollars at historic rates, the two schedules diverge for a third reason entirely independent of the rules: exchange rate movement. A pound of writing down allowance claimed in 2019 and a pound of ADS depreciation on the same expenditure are different dollar amounts, permanently. There is no retranslation mechanism that closes the gap.

Two further currency points routinely go unaddressed on takeover. First, where the property is mortgaged in sterling, repayment or refinancing of that borrowing can produce a separate US foreign currency gain that has no UK counterpart whatsoever and is not sheltered by any property relief. Second, the UK tax paid must be translated for foreign tax credit purposes on a defined basis, and the translation date is not the same as the date used for the income it relates to. For high net worth owners with several properties and rolling refinancings, these two items alone can exceed the value of the depreciation difference.

How do you actually prepare and reconcile both returns?

The workable sequence, in the order we run it:

• Fix the expenditure analysis once. Commission or obtain a single component breakdown of the acquisition and every subsequent capital spend. Map each line twice — once to UK pools and SBA, once to US basis and any ADS component lives. One survey, two mappings, never two surveys.
• Establish the land split with evidence. UK completion statements rarely give one. Both returns need it; the US return needs it most.
• Prepare the UK property business computation first, because it determines the UK tax actually paid, which is the input to the US credit.
• Rebuild the US Schedule E from source, not from the UK computation. Start with gross rents, apply US characterisation of repairs versus improvements, add ADS depreciation from your own schedule, and apply the US rules on interest, professional fees and ground rents. Do not import the UK taxable profit and adjust it — that approach hides the SBA and pool movements inside a single reconciling number and fails the first time it is examined.
• Align the periods. The 6 April year end and the calendar year do not match. Rents and UK tax payments must be allocated to the correct US year, which for most dual filers means an accruals-basis foreign tax credit election is preferable to the paid basis.
• Carry a standing reconciliation schedule showing, per year, cumulative UK allowances claimed, cumulative US depreciation taken, and the running difference in both currencies. This document is what makes the eventual disposal computation possible. Without it, the exit is guesswork.

What happens to the foreign tax credit?

UK rental profits fall to be taxed in the UK as the situs state, and the US relieves the double charge by credit rather than exemption for a US citizen. The mechanical friction is entirely caused by the depreciation mismatch.

In the years when UK relief is front-loaded — the acquisition year, a major refit year, any year with a large Annual Investment Allowance claim — the UK taxable profit is small or nil, so little or no UK tax is paid, while the US profit remains substantial because ADS gave almost nothing. The result is US tax due with no foreign tax credit to offset it. In later years the position inverts: the UK pools are depleted, UK tax rises, and excess credits accumulate in the passive category with a one-year carryback and ten-year carryforward that may never be usable if the property is sold in the interim.

There is also a charge that no credit reaches at all. The net investment income tax applies to passive rental income and to gain on disposal, and foreign tax credits cannot be applied against it. A dual filer with a profitable UK commercial portfolio will pay that charge on top of UK tax, every year, irrespective of how much UK tax was paid. Modelling it is part of the US tax services work, not an afterthought.

How does the divergence change the gain on sale?

The UK exit

Disposal triggers a balancing adjustment on the plant and machinery pools: proceeds attributable to fixtures, capped at original cost and typically fixed by a fresh section 198 election with the incoming buyer, are brought in as disposal value. If that exceeds the pool balance, a balancing charge arises and is taxed as income of the property business. SBA works differently and catches people out: there is no balancing adjustment, but the total SBA claimed is effectively added back in the capital gains computation by reducing allowable base cost, so the relief is clawed into the chargeable gain rather than into income.

The US exit

The US computes an entirely separate gain from an entirely separate basis. Cumulative ADS depreciation — allowed or allowable — has reduced that basis. Straight-line depreciation on the real property produces unrecaptured section 1250 gain taxed at a maximum 25%, with the remainder taxed at long-term capital gain rates plus the net investment income tax. Any components that were segregated as personal property recapture under section 1245 at ordinary rates.

Because US depreciation over the holding period is almost always smaller than cumulative UK allowances on a shorter hold, and because the UK adds SBA back into the gain while the US adds all depreciation back into basis, the two gains will differ in size, in character, and in the year they are recognised. That last point is the dangerous one: a UK completion in February and a UK capital gains tax payment due within 60 days can still fall in a different US tax year from the one in which the gain is reported, stranding the credit.

Where relief was never claimed: unfiled and misfiled years

Many of the cases that reach us involve a property that has been let for years while one or both returns were wrong or missing entirely — the accidental American who never filed a US return, or the US-resident owner who never registered for UK self assessment. The recovery routes are not symmetrical.

The US side: allowed or allowable

US basis is reduced by depreciation allowable, whether or not it was actually claimed. Failing to depreciate does not preserve basis; it simply forfeits deductions while still suffering the reduction on sale. That makes correcting the position mandatory, not optional.

• Returns never filed. Prepare each delinquent year with the correct ADS schedule from the placed-in-service date. There is no method to change because no method was ever adopted. Where the non-compliance was non-wilful, the delinquent years are usually best delivered inside a formal disclosure programme — our IRS streamlined filing team runs these as a matter of routine, and the IRS sets out the framework in its streamlined filing compliance procedures.
• Returns filed with no depreciation, or with the wrong system. Where an impermissible method was used on two or more consecutive returns — including using the general system instead of ADS, or claiming bonus depreciation that was never available — the correction is a change of accounting method on Form 3115 with a cumulative catch-up adjustment, not a string of amended returns. Where the property was over-depreciated, that adjustment runs against the taxpayer, and it is better found by us than by an examiner.

The UK side: what survives and what is gone

• Pool writing down allowances survive. Unclaimed WDAs are not forfeited; the expenditure sits in the pool and can be relieved in later periods, so a late-filed or catch-up UK position can still extract them going forward.
• SBA is lost, year by year. Every chargeable period that closed without an SBA claim is gone permanently. On a property held through several unfiled years this is frequently the single largest number in the file.
• AIA and first-year allowances are lost for that expenditure, though the cost falls into the pool and attracts WDAs prospectively.
• Amendment windows are short but overpayment relief is longer. Where a return was filed, the ordinary amendment window is twelve months from the filing date, with a longer overpayment relief claim period beyond it — but because pools carry forward, much of the value can often be recovered prospectively without reopening closed years at all.
• Allowance statements must be reconstructed. An SBA claim without a compliant statement is not a claim, and the document usually has to be obtained from the developer or prior owner before anything can be filed.

Common errors we correct on takeover

• US depreciation computed on the sterling purchase price converted at today's rate rather than at historic cost rates.
• The general depreciation system applied to a foreign building, producing a 39-year or accelerated schedule that is simply wrong and now needs a Form 3115.
• Bonus depreciation claimed on a UK refit because the preparer's software defaulted to it.
• UK taxable profit imported directly onto Schedule E, burying the capital allowances adjustment and making the disposal computation unbuildable.
• Section 198 elections signed at £1 without anyone checking whether the UK relief being surrendered was worth more than the negotiating point conceded.
• SBA claimed without an allowance statement, or not claimed at all because the adviser assumed the pre-2018 building was ineligible in its entirety when qualifying post-2018 renovation expenditure existed.
• No running reconciliation of cumulative relief in each system, discovered only at the point of sale.

Speak to us before the next filing or the next completion

UK commercial property in the hands of a dual filer is one of the few asset classes where both returns can be individually defensible and the combined position still be wrong — on the credit, on the election, or on the exit. If you own UK commercial premises and file in both systems, or if there are years where one or both returns were never filed and relief was never claimed, we will rebuild the position from the expenditure upwards and give you a single reconciled schedule you can rely on for the life of the asset. Please contact our cross-border team for a confidential consultation.