Capital Allowances on Furnished Holiday Lets

Tax free income anyone?

Because of the changes to tax relief on interest payments for Buy to Lets, many are left looking for ways to improve the tax efficiency of their investments. For those lucky enough to have rental properties in areas with demand for holiday lets there is a highly tax efficient alternative to buy to Let.

With the ability to claim tax relief on fixtures Furnished Holiday Lets (FHL) can potentially deliver a tax-free income for many years without engaging in anything that could be seen as provocative to HMRC. Read on and we shall explain how this is possible.

Properties within the European Economic Area ‘EEA’ that fulfill the criteria are classed under UK taxation as Furnished Holiday Lets. The main points of the criteria are listed below.

1. The Property must be based in the EEA (https://www.gov.uk/eu-eea for the list of EEA countries)
2. Available to rent for at least 210 days per year
3. Actually let for at least 105 days
4. Generally short let (no more than 31 days)

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

Compared to Buy-to-Let’s, successful Furnished Holiday Let’s (FHL) are generally a higher revenue/higher running cost investment. This article is not focused on the commercial elements of this business, however needless to say like Buy-to-Let, with the right property in the right location and with the right team around you there are returns to be made. Of course, the inverse is also true. What we are interested in here is the tax benefits of this area of property.

Furnished Holiday Let’s (FHL) are exempt from the restrictions to higher rate interest relief that affect the Buy-to-Let market. Whilst this alone is great news, it gets even better!

Capital Allowances

What is not generally known is that a Furnished Holiday Let is able to claim Capital Allowances on plant and machinery used within the business. This not only covers the loose plant (e.g. furniture, white goods etc) but also extends to the fixtures and integral features within the building (sanitary-ware, electrics, heating, fitted carpets etc).

Capital Allowances are a form of tax relief given on eligible items of plant and machinery. They reduce your taxable profit and therefore the amount of tax you pay. They are generally given over time in a similar way to depreciation in accounting. Capital Allowances can also be accelerated for recent expenditure using the Annual Investment Allowance ‘AIA’ (the AIA is currently £1m per annum). This means that in most cases the tax relief is all given in year one rather than bit by bit over a number of years.

So coming back to our Furnished Holiday Lets (FHL), a proportion of the purchase price of a property is deemed to have been to pay for the fixtures that were in place at the time. 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 straight forward! A claim on these items involves calculating an apportionment (effectively the ratio between the items you can and the items you can’t claim) of the purchase price. Due to the cross-discipline nature of the work (tax and surveying), this requires a specialist firm like STax to undertake the work.

Size of Capital Allowance Claims

The size of these claims can vary greatly depending on the quality and quantity of items installed, however for a Furnished Holiday Let (FHL) they average around 25% of the purchase consideration, so £125k of allowances for a property which cost £500k. With the AIA at the elevated level it is, this can create a massive reduction in your taxable profit or even trigger a tax rebate in some cases.

Imagine a successful Furnished Holiday Let (FHL) that yields 5% taxable profit before allowances. The property was purchased for £500k in 2015 and a Capital Allowance survey was conducted and a claim for £125k of Capital Allowances made. This gives us taxable profits over time as below:

FHL Capital Allowance savings
FHL Capital Allowance savings

In this example, we have assumed the allowances are fully covered by the AIA.

As you can see no tax is payable until year six by which time the FHL owner has netted £125k of income with no tax due.

The combination of availability of Capital Allowances with the exemption to the changes for higher rate tax relief on interest makes Furnished Holiday Lets (FHL’s) a very attractive alternative to Buy to Let, of course, you do need the right advisors in place.

This makes us perfectly positioned to assist you in this area or any other real estate related tax matter.

If you are looking to change your buy to let to furnished holiday lets, buy new furnished holiday lets or simply claim on those you have had for a while, please contact us today for a free appraisal of your position. We charge our fees as a percentage of the benefit we deliver, no allowances, no charge.

All charges and engagements will be agreed and set out in writing prior to chargeable work commencing. So give us a call today for a free initial appraisal.