Define 'capital allowances'.

Capital allowances are a mechanism in tax legislation allowing businesses to claim tax deductions on the capital expenditure incurred when purchasing tangible assets, such as machinery, equipment, and buildings. This concept is pivotal because it helps businesses recover costs associated with investing in long-term assets over time rather than all at once during the year of purchase.

The significance of capital allowances lies in their role in reflecting the wear and tear that these assets experience during their useful lives, thereby easing the financial burden on businesses by reducing taxable profits. This kind of tax relief encourages investment in assets that can improve productivity or efficiency within the business.

In contrast, other options do not align with the definition of capital allowances. Donations to charity, operational costs, and payments on inherited assets represent different areas of tax considerations and do not pertain to how businesses handle expenditures for capital assets through tax reductions. Therefore, focusing on tax deductions for capital expenditure provides the correct understanding of capital allowances in the context of taxation.