Capital allowance claims for furnished holiday lets

UK staycations are expected to continue in popularity in 2023 as the cost-of-living crisis drives consumers to cut back on holiday spending and opt for shorter breaks in UK.

Furnished Holiday Lets (FHLs) offer several tax benefits which are not available to traditional buy-to-let businesses. These include full mortgage interest relief, pensions relief (FHL profits count as relevant UK earnings), Capital Gains Tax reliefs (e.g. Business Asset Disposal Relief & Business Asset Rollover Relief) and the ability to claim capital allowances. Capital allowances provide tax relief for expenditure on certain capital assets used in the holiday rental business.

The two main categories for which qualifying spend fall into are integral features (electrical, lighting and heating systems) and fixtures and fittings (beds, furniture, electrical goods). Integral features can generally make up to 25% of the capital value of the property if purchased or a similar level if the house is built from scratch.

Capital allowances can therefore represent a significant tax saving and can be very beneficial for higher and additional rate taxpayers; relief can be set against their rental profits at their highest marginal rate of tax (42% and 47% respectively from 2023/24).

While capital allowances usually accrue over a number of years, the Annual Investment Allowance (AIA) provides 100% tax relief in the year of expenditure and will generally be available, meaning full relief can be taken upfront and tax liabilities significantly reduced. The AIA limit is currently set at £1 million.

Capital allowances are available from the date your FHL starts to trade, but you may also be able to claim on items you purchased before trading, if those items were necessary for the business to operate.

If you have not claimed capital allowances in the past, all is not lost. A historical expenditure claim can be made, provided no prior capital allowance claims have been made by the previous owner(s). If you are purchasing an existing FHL property which has not previously claimed capital allowances (or not claimed them fully) an election can be made during the purchase process to allow allowances to continue to be claimed. Please note however that the AIA is not available for historic claims and generally the majority of the expenditure will achieve tax relief at 6-18% per year. This is the value that is deducted from the FHL profits before any tax liability is calculated.

It is a common misconception that losses generated from a FHL can be offset against the operator’s other income, but this is not the case. The losses are locked into the FHL business and can only be offset against future profits of the trade.

Our EQ Leisure specialists have provided working examples of a FHL making a new and historic capital allowance claim here.

For more information or advice based on your circumstances, please get in touch by calling one of our offices or emailing leisure@eqaccountants.co.uk.