Can You Claim Capital Allowances on Equipment Bought with a Business Loan?

Ownership is the key test

Capital allowances are available to the entity that owns the asset and uses it in a qualifying business activity. When your company purchases equipment outright — even if it funds that purchase with a loan — it owns the asset from the point of acquisition. Ownership is what matters for capital allowances, not the source of funds used to pay for the asset.

This means the full purchase price of the equipment can enter your capital allowances pool, and you can claim the Annual Investment Allowance (AIA) in the year of purchase, subject to the AIA limit in force at the time. The AIA limit changes periodically; confirm the current figure with your accountant.

Loan interest is deducted separately

The interest you pay on the loan used to fund the purchase is a separate deductible cost under the Loan Relationships rules — it is not added to the cost of the asset for capital allowances purposes. You therefore get two distinct reliefs: a capital allowances deduction on the asset cost, and an interest deduction on the financing cost. These operate independently.

Do not conflate the two. The asset's capital allowances pool is based on the acquisition cost exclusive of any financing costs. Your accountant will ensure both are correctly accounted for in your tax return.

How the AIA works in practice

The Annual Investment Allowance lets most businesses deduct the full cost of qualifying plant and machinery in the year of purchase, up to the annual limit. For a company spending £200,000 on machinery financed by a loan, the AIA would — assuming sufficient allowance headroom — give a full £200,000 deduction in year one, significantly reducing that year's taxable profits.

Assets that do not qualify for AIA (for example, cars, or assets bought in the accounting period a company closes) fall into the main pool (18% per year reducing balance) or special-rate pool (6%). Some assets, such as integral building features, go into the special-rate pool by default. Confirm which pool applies to your specific asset with your accountant or tax adviser.

Asset finance and hire purchase: a different picture

If your company acquires equipment under a hire purchase (HP) agreement rather than an outright purchase loan, the position is broadly similar — the company is treated as the owner of the asset from the start of the HP agreement and can claim capital allowances. However, finance leases and operating leases are treated differently: in a true operating lease, the lessor owns the asset and claims the allowances, not the lessee.

The distinction between HP and leasing matters for both capital allowances and VAT. If you are unsure how your finance agreement is classified, check the agreement documentation and confirm with your accountant before filing your return.