Furnished Holiday Let Capital Allowances

Simon Misiewicz

Expat & Property Tax Specialist

4th June 2022

What are the basics of furnished holiday lettings capital allowances?

Furnished holiday lets (FHL) are a trading business and taxed accordingly.

An FHL is a separate category of buildings that stands apart from residential and commercial properties.

HMRC considers an FHL to be a trade.

Tax allowances are available for FHLs that are not available to buy-to-lets as they are classed as an investment rather than a trading business for tax purposes.

These are called capital allowances.

Capital allowances are a tax reduction on the reduction value of  “plant and machinery” assets.

This includes the furniture, fixtures, and fittings in the FHL business.

Capital allowances allow the business to write off the cost of these assets over a period of time.

This is usually done by offsetting a percentage against the taxable profit.

In some cases, this can mean tax-free profits on FHLs for several years.

Some FHL business owners offset the full amount of certain “plant and machinery” assets in the first year.

This is called an Annual Investment Allowance (AIA).

What is a FHL?

An FHL is where people stay for a few nights or weeks.

Furnished Holiday Lettings differ from a residential buy-to-let investment where a tenant stays for a minimum of six months under an Assured Shorthold Tenant (AST) agreement.

Furnished holiday lets often charge on a per-night basis.

Someone staying in an FHL would not expect to pay utility bills.

Landlords can make more money from FHLs than on single-let investments.

FHL investors can also save tax compared to those investing in single lets.

An FHL is still referred to as a rental investment.

This enables certain tax benefits for holiday home tenants.

What qualifies as capital allowances on FHL?

Certain assets and fixtures in an FHL investment can benefit from tax relief such as heating, lighting, ventilation, as well as data and power installations.

Buying an FHL could mean that 20-25% of the purchase prices qualify for capital allowances.

This represents a significant tax saving and can be very lucrative for higher and additional rate taxpayers.

They can set the relief against rental profits at the highest rate of tax – 40% and 45%, respectively.

Capital allowances usually accrue over a number of years but the AIA provides 100% tax relief in the year of expenditure.

FHL landlords can benefit from upfront tax relief and reduce liabilities.

If capital allowances have not been claimed in the past, claiming on historical expenditure could provide a windfall for FHL investors.

How do I claim FHL capital allowances?

Capital allowances can be claimed on a new build or conversion of a qualifying FHL investment at the end of the tax year on your self-assessment tax return or company accounts.

Capital allowances can also be claimed on an existing FHL that has not previously claimed capital allowances.

In addition to capital allowances, allowable expenses can be offset against rental profits to reduce the amount of tax due.

It is worth reviewing the HMRC Property Income Manual and PIM4140 on the special tax treatment of furnished holiday lettings.

What are the tax benefits of FHL?

FHLs offer investors several attractive tax benefits.

These include mortgage interest tax relief, capital gains tax reliefs that are available for traders, such as business asset disposal relief (formerly called entrepreneurs’ relief) and profits which count as earnings for pension purposes.

Capital allowances provide tax relief for expenditure on certain capital assets used in holiday rental businesses.

Certain conditions must be met for a letting business to qualify as an FHL business.

This includes the obvious trading hallmarks, such as the intention to make a profit from letting one or more properties that are furnished appropriately.

There are occupancy levels to fulfil, as well as the pattern of occupation, availability and letting conditions.

None of the conditions required to satisfy FHL business status is challenging, but investors should be aware before listing their furnished holiday let for rent.

Capital allowances are sometimes dismissed or not considered by FHL business owners.

An FHL is not the same as other residential rental investments, and the tax benefits are significant.

It is important to understand the tax benefits of furnished holiday lets.

Can I use FHL capital allowances to reduce taxable profits?

The furnished holiday let capital allowances scheme can be applied to the business’s profits.

This will reduce the taxable profits and the amount of tax you will pay as an FHL business owner.

Capital allowances are only available on FHL and commercial buy-to-let investments.

Here is a good example of furnished holiday letting capital allowances in action.

James and June buy a holiday let in West Cornwall for £300,000.

The buy-to-let was furnished and refurbished to a high standard.

They pay for a furnished holiday lettings capital allowances survey that identifies 25% cost.

This can be used as a tax deduction on their self-assessment tax return.

They are both high-rate taxpayers.

As a result of the £300,000 furnished holiday let, a capital allowances claim would enable them to save £30,000 income tax liability on their UK self-assessment tax return.

The figures work out as follows:

£300,000 property purchase price

£75,000 capital allowances claim identified in the survey (£300,000 x 25%)

£30,000 income tax saving from the capital allowances on furnished holiday lets (£75,000 x 40% high-rate income tax band).

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