Furnished Holiday Lets & Capital Allowances

Date: August 4, 2022

The landscape for worldwide holidays has yet to fully recover following the pandemic, and it’s clear the UK holiday market is still booming, with many people opting for holidays a little closer to home to avoid the current airport chaos.

Given the UK has some of the most beautiful countryside & coastal spots in the world, combined with the self-contained nature of Furnished Holiday Lets (FHLs), it’s not hard to understand why this type of UK holiday accommodation is still so incredibly popular with holidaymakers.

Given the current exceptionally high demand for UK holiday accommodation, owners of FHLs should consider the tax benefits they are entitled to and maximise their increased income.

While it is well-known capital allowances tax relief is available on hotels or bed & breakfast establishments, FHLs also have access to this relief under the correct conditions.

What is the definition of an FHL?

For a property to be classed as an FHL it must meet a very strict criterion set by HMRC. The reason for this is to allow HMRC to make a clear distinction between a residential property that is occasionally let out to holidaymakers or friends & family (which does not qualify for tax relief) and a genuine commercial holiday letting activity.

The following must be met to class a property as an FHL:

1. The property must be situated in the UK or in the European Economic Area (EEA).

2. The property must be furnished.

3. The property must be commercially let (you must intend to make a profit).

4. The property must be available for commercial letting as holiday accommodation to the public for at least 210 days in the relevant 12-month period (the tax year).

5. Out of those 210 days, the property must actually be let out for 105 days or more as holiday accommodation.

6. Long term occupation (let for 31 days or more to a member of the public) must not exceed 155 days in the tax year. Any period of long term letting cannot be counted towards the 105 days of commercial holiday letting required to qualify.

Advantages – The seller’s angle

In order to claim capital allowances on an FHL, we must establish that no prior capital allowances claims have been carried out by any prior owner(s) of the property. The fantastic bonus of FHLs is that invariably the property was previously used as a residential dwelling by previous owners. Capital allowances are not available on residential dwellings. Therefore, we can easily establish for the FHL owner that no claims have been made by prior owners, allowing them to make a claim.

This also allows claims on most FHLs not to fall foul of new HMRC legislation which restricts capital allowances claims on purchases after April 2014. As previous owners utilised the property as a residential dwelling, they do not meet the criteria set out in the 2014 legislation, allowing an unrestricted claim for the FHL owner.

Advantages – Our client’s benefit

Another trend among FHLs is that they are commonly owned individually and not by a company. If the owner is a higher rate taxpayer, a potential capital allowances claim can save them from paying 40% tax on their FHL income! A saving not to be missed!

Other tax advantages

As well as capital allowances there are also other tax advantages to FHLs. If a loan is taken out to purchase the FHL, the full amount of interest paid in respect of the loan receives relief as a deduction from the rental income.

FHLs also qualify for certain capital gains relief that normal lettings do not. These include rollover relief, gift relief and entrepreneurs’ relief.

The disadvantage

The only drawback of capital allowances claims on FHL properties is that capital allowances can only be utilised against FHL profits, and any losses created by FHL capital allowances cannot be offset against any other income. Therefore, in isolation, the FHL business must be profit-making to benefit from a capital allowances claim.

Keep a look out

So, if you are going on a UK holiday this year in an FHL or know of someone who owns an FHL, ask if they have considered capital allowances on their property. With an estimated capital allowances claim on an FHL in the region of 25% of the purchase expenditure, there could be substantial tax relief just waiting to be claimed.

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