Solar Panels and Capital Allowances: How the AIA Really Works

If your panels are fixtures

• Who can claim is decided by the fixtures rules. In most cases that's the business that incurs the expenditure and holds an interest in the building, meaning the freehold or a lease. An occupier with only a licence may not qualify.
• When relief arrives follows the normal timing rules, not the hire purchase shortcut. Expenditure is generally incurred when the obligation to pay becomes unconditional, and where payment isn't due until more than four months after that, on the date it's due. On an agreement paid monthly over several years, relief can end up following the capital element of each instalment. On a 10-year agreement, the capital repaid in the first year can be well under 10% of the price.
• The total relief isn't lost, but its timing can be very different from the year-one figure most solar content assumes.

What to do about it

If year-one relief matters to your plans, have your accountant read the actual finance agreement, and confirm how the system will be installed, before you sign. Ask us whether a loan-funded purchase, where your business buys the system from the installer, is available for your deal. When your business is the buyer, the full cost is generally incurred when you become unconditionally obliged to pay the installer. If your adviser concludes the system won't be a fixture, the normal hire purchase rule applies, and bringing the system into use before your year-end is what brings the relief into that year.

Tenants and operators who don't own the building should read this alongside the landlord consent points in our care home and hotel solar guide, where the operating company and property company are often different businesses.

The £1 million limit applies per accounting period and is adjusted proportionally if the period isn't 12 months long. Companies in the same group share one limit. So do businesses under common control that are related to each other, broadly because they share premises or carry on similar activities. Having the same owner isn't enough on its own, and the test is detailed enough that it's worth asking your accountant rather than guessing.

Where a limit has to be shared, the businesses can split it however they choose. If total spending in the period is over £1 million, the usual approach is to point the AIA at special rate spend such as solar first, because the fallback for that spend is 6% a year. Main rate equipment has better fallbacks: full expensing for companies, or the 40% first-year allowance for unincorporated businesses. Large systems, where this comes up most, are covered in our warehouse and industrial solar guide.

The AIA is a claim, not an obligation, and you can claim less than the maximum. That can help if claiming it all would create a loss you can't use, or would waste a sole trader's personal allowance. Any solar spend you don't claim goes into the special rate pool at 6% a year, so a partial claim has a real cost and is worth modelling first.

If a claim does create a trading loss, the loss isn't wasted. A company can generally carry it back against the previous 12 months' profits, carry it forward against future profits (with a restriction on very large amounts), or surrender it to other companies in its group. A sole trader or partner can generally set it against other income of the same or previous tax year, subject to a cap, or carry it forward against future profits of the same trade.

Sole traders and partnerships should also check their accounting basis. The cash basis became the default for unincorporated businesses from the 2024/25 tax year, and under it, capital allowances generally can't be claimed except on cars. Unless you've opted out, confirm with your accountant how spending on fixtures such as solar is treated.

Allowances claimed now can come back later. Selling the system, or the building it's fixed to, is a disposal. Where the 50% first-year allowance was claimed, half the disposal value is taxed straight away as a balancing charge and the other half reduces the special rate pool. Where the AIA was claimed, the disposal value is deducted from the pool, which can also create a balancing charge.

When a building is sold with solar panels fixed to it, the buyer can only claim allowances on them if the seller had pooled the expenditure and the two sides fix a value, normally through a joint section 198 election made within two years of the sale. Keeping the invoice and your capital allowances records, and making sure the spend is pooled, protects the value for you and for a future buyer.