Furnished Holiday Lets – Tax free income anyone?

Buy-to-Let properties have recently been subject to changes in tax rules, leaving many looking for new ways to improve the tax efficiency of their investments. If you own a rental property for holiday lets, there is a highly efficient alternative to Buy-to-Let.

Furnished Holiday Lets (FHL’s) can potentially deliver many years of tax-free income by allowing property owners to claim tax relief on fixtures. Continue reading to find out how this is possible.

What is a Furnished Holiday Let?

A Furnished Holiday Let is a rental property classification that offers property owners a variety of tax advantages. These properties sit on the boundary between ordinary and commercially let properties, presenting unique opportunities to maximise earnings.

Properties considered as Furnished Holiday Lets must adhere to certain criteria to be recognized under UK taxation. Some of these requirements include:

1. Properties must be based in the European Economic Area (EEA)
2. Available to rent for at least 210 days per year
3. Properties must be let for at least 105 days per year
4. Each let must not exceed 31 days

Please note these are just the main criteria, detailed guidance is available on www.gov.uk

Furnished Holiday Lets tend to have a higher revenue/running cost investment compared to Buy-to-Let properties. However, unlike Buy-to-Lets, Furnished Holiday Lets are exempt (assuming non-company ownership) from restrictions on higher rate interest relief. This makes Furnished Holiday Lets ideal for securing profitable returns, especially if owners have the right property in the right location.

Capital Allowances

Furnished Holiday Lets can claim Capital Allowances on plant and machinery used within the rental business. This not only covers the loose plant (e.g. furniture, white good etc.) but also extends to the fixtures and integral features within the building (sanitary-ware, electrics, heating, fitted carpets etc).

What are capital Allowances?

Capital Allowances are a form of tax relief given on eligible items of plant and machinery. They reduce your taxable profits, and therefore the amount of tax you pay. These allowances are generally distributed incrementally over several years. However, the allowances can also be accelerated for recent capital expenditure using the Annual Investment Allowance (AIA). The AIA is currently set at £1m per annum, meaning in most cases, all the tax relief can be claimed in the first year.

How do they work?

A proportion of the purchase price on a property is deemed to have been paid for the fixtures that were in place at the time of the purchase. You are perfectly entitled to claim Capital Allowances on these regardless of how long ago the purchase was. Unfortunately valuing them in a way HMRC will accept is not straightforward. A claim on these involves making an apportionment calculation.

Delivering Capital Allowance claims such as these requires cross-disciplined work in taxation and surveying. To ensure claims are carried out efficiently and effectively, we recommend working with a specialist firm such as STax.

Size of Capital Allowance Claims

The size of Capital Allowance claims vary depending on the quality and quantity of items present. For a Furnished Holiday Let, the average claim is approximately 25% of the purchase consideration. For example, a property which cost £500k could expect to find £125k in Capital Allowances. With the AIA at the current elevated level, this can create a massive reduction in your taxable profits or even trigger a tax rebate.

Working Example

Imagine a property was purchased for £500k in 2018. This property has been used as a Furnished Holiday Let, yielding 5% taxable profit before allowances. A Capital Allowance survey was conducted and a claim for £125k in Capital Allowances was made. This results in the following taxable profits over time:

FHL Capital Allowance savings
FHL Capital Allowance savings

Assuming Capital Allowances are fully covered by the Annual Investment Allowance, no tax is payable until year six. By this time, the property owner has netted £125k of income with no tax due.

What to do next

The availability of Capital Allowances on Furnished Holiday Lets makes them an attractive alternative to Buy-to-Let properties. This is enhanced by the exemption to the changes for higher rate tax relief on interest. To make full use of these opportunities, it is important to have the right advisers in place.

STax are a specialist firm, combining qualified tax advisors, accountants and surveyors which make us perfectly positioned to help you make these claims.

If you’re looking to change your Buy-to-Let into a Furnished Holiday Let, buy a new Furnished holiday Let or simply claim on an existing property, contact us today.

We offer free appraisals of your position, and only charge our fees as a percentage of the benefit we deliver. No allowances, no charge.