Capital Allowances on Furnished Holiday Lets (FHL) in the UK

The UK holiday let market is booming, with over 70% of British holidaymakers prioritising local attractions and activities when choosing a holiday rental property. Owning a Furnished Holiday Let (FHL) in the UK can be financially rewarding, particularly due to the available capital allowances that offer significant tax benefits. Understanding how these allowances work and how to claim them is crucial for maximising your investment returns.

What Are Capital Allowances for FHLs?

Capital allowances provide tax relief for owners of FHLs on expenditures related to certain capital assets used in their holiday rental businesses. These allowances are based on the value of assets categorised as “plant and machinery,” which, in the context of an FHL, includes items like furniture, fittings, equipment, and fixtures.

Unlike standard residential rentals, FHLs are treated as trades for tax purposes, which allows for these capital allowances. This distinction is essential because such tax relief benefits are not available for regular buy-to-let properties.

Qualifying for FHL Status

To be classified as an FHL for tax purposes, specific conditions must be met:

• The property must be furnished and let on a commercial basis.
• It must be available for letting for at least 210 days in the tax year.
• It must be actually let for 105 days in the tax year.
• Lets of more than 31 days should not exceed 155 days in the tax year.

Available Capital Allowances

Annual Investment Allowance (AIA)

Landlords can claim AIA or writing down allowances for their FHLs. AIA provides relief for 100% of the qualifying expenditure in the tax year it was incurred, up to a set limit.

Writing Down Allowances

If AIA is not claimed or unavailable, writing down allowances can be claimed, allowing a percentage of the expenditure to be deducted from taxable profits over time.

Super-Deduction and First-Year Allowances

For companies, there is also the option to claim the super-deduction for certain expenditures, which allows 130% of the expenditure to be deducted when calculating profits. Additionally, a 50% first-year allowance may be available for expenditures qualifying for writing down allowances at the special rate.

Items Eligible for Claims

Landlords can claim capital allowances on various items within their FHL, such as furniture, white goods, and small appliances. However, permanent fixtures like plumbing, heating systems, kitchen units, and carpets are not included under “plant and machinery” capital allowances.

The Impact of Capital Allowances

Capital allowances represent significant tax savings, particularly for higher rate taxpayers, as they can be set against rental profits at the highest and marginal rates of tax. For the 2023/24 tax year, these rates are 42% and 47% respectively.

Additionally, other usual allowable expenses can reduce the tax due by offsetting them against profits.

It’s essential for FHL owners to understand these allowances, identify qualifying expenditures, and claim them effectively. Seek professional advice from Yuzu Group’s tax experts and navigate the complexities of these allowances and ensure compliance with HMRC requirements and boost your bottom line.