Furnished Holiday Lets and Capital Allowance
Furnished holiday lets remain popular, whether as an additional income stream or as a fully-fledged business. However, many owners miss out on tax relief they are entitled to through the capital allowances regime. Where property is purchased and/or improved for use as a holiday let, significant tax relief may be available for companies, individuals and partnerships alike.
This article will talk about the potential allowances available for furnished holiday lets, as well as the rules and conditions of such claims.
What are the qualifying assets?
Any capital allowances exercise will look to identify the qualifying plant and machinery assets in the property, as such expenditure can benefit from 100% first-year allowances, like the Annual Investment Allowance. Plant & Machinery (“P&M”) can be split into two categories:
- Main Pool P&M – Furniture, sanitaryware, fire detection and containment, security installations, carpets, kitchen installations, and equipment.
- Special Rate Pool P&M – Electrics, lighting, ventilation, heating, domestic water and solar panels.
The above list is not exhaustive but highlights the qualifying assets commonly found in a holiday property. Keep in mind that in order to benefit from any 100% first-year allowances, the expenditure must be claimed within two years of the end of the financial period where the expenditure was incurred.
So when to think about capital allowances?
Typically allowances arise on the purchase of the property and/or on development or refurbishment works undertaken at the property.
Property Purchases
Where a formerly residential property is purchased with the intention of converting it into a furnished holiday let, it's very likely that a proportion of the purchase will qualify for allowances, as no relief could historically have been claimed on a residential property.
In such cases you may expect somewhere in the region of 30% of the purchase price to qualify for allowances.
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Case Study A client purchased a country home in a picturesque rural area, for conversion into a furnished holiday let. As the property was historically residential, and the Furnished Holiday Letting conditions would be met (see below), allowances could be claimed on the purchase price. Of a c.£1.5m purchase price, £450k of allowances were identified, all of which arose in the year of purchase through the Annual Investment Allowance. These allowances are equivalent to tax savings of £180k assuming a 40% income tax rate. |
Property Improvements
Allowances will also be available on expenditure incurred on the development or refurbishment of a qualifying furnished holiday let. For £200k spent on refurbishing a property, you could expect half or more of that to qualify for Plant & Machinery Allowances, arising entirely in the first year through the Annual Investment Allowance. £100k of allowances is equivalent to tax savings of £40k for an individual paying income tax at 40% or £25k for a limited company paying the 25% corporation tax rate.
Entitlement conditions
For any claim we must consider the Furnished Holiday Lettings rules. Capital allowances are not typically available on properties that would fit the dwelling definition, but furnished holiday lets specifically can benefit from allowances through these rules.
To qualify a property must be let on a commercial basis and furnished sufficiently to accommodate visitors. Additionally, three occupancy conditions must be met (from HMRC manual PIM4110):
The Pattern of Occupancy Condition
- The total lettings that exceed 31 continuous days, must not exceed 155 days in the year.
This condition prevents longer-term accommodation from benefitting from these rules designed just to apply to short-term holiday lets.
The Availability Condition
- The property must be available for letting as furnished holiday accommodation for at least 210 days in the year.
This condition intends to ensure the property is in use for its commercial purpose. Days where the owner is staying there may not count towards the 210 days (even if the property was not booked).
The Letting Condition
- The property must be commercially let for at least 105 days in the year.
This is often the condition that can cause the tests to fail for certain properties. Letting the property at a reduced rate to friends wouldn’t be counted, nor would letting that lasted more than 31 days.
Where the property fails to be let for 105 days in the year, the owner may make an election to reach the threshold:
- The averaging election – where multiple properties are let, the average occupancy rate across the portfolio may be considered, instead of the individual occupancy per property.
- The period of grace election – where the owner genuinely intended to meet the condition (and can show this) but could not, they may make this election so long as the other two conditions were met. This election may be made in the two years following a year where the letting condition was met. In the third year following this election may no longer be made.
The elections may be used in combination where it would allow a business to retain furnished holiday letting status.
What happens when a property ceases to be a furnished holiday let?
If the property is sold, used for private occupation or fails to meet the conditions, the FHL status will be lost. In such a case a deemed disposal for tax purposes is triggered and balancing charges/allowances may arise. There may also be implications for Capital Gains Tax Relief.
If you are buying, building, converting or improving a furnished holiday let, we are happy to provide a free consultation on the capital allowances opportunities and considerations. Get in touch at cal@yes.tax
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