As UK staycations look set to boom, furnished holiday lettings (FHL) offer investors a number of attractive tax benefits, including mortgage interest relief, capital gains tax relief for traders and profits which count as earnings for pension purposes. Commonly overlooked by FHL landlords, capital allowances provide tax relief for expenditure on certain assets used in the holiday rental business.
For tax purposes, FHLs are a separate category of property that stand apart from residential and commercial properties. They are treated as a trade by HMRC. To qualify as an FHL certain conditions must be met including obvious trade signals such as an intention to make a profit from letting a property which is furnished to an appropriate level. In addition, there are occupancy conditions to fulfil (pattern of occupation, availability condition and letting condition). None of these requirements and conditions are particularly onerous or challenging but investors should check that they meet them before listing their FHL for rent.
FHLs are often mistakenly thought of as residential dwellings (which attract no such tax relief). Capital allowances are simply dismissed or not considered by owners. These allowances could be HMRC’s free gift for many FHL investors. However, much like flat-pack furniture, it’s one you assemble yourself by establishing and making a claim for capital allowances.
The capital allowance rules allow for certain fixtures inherent in the property (known as plant and machinery) to benefit from tax relief, including assets such as heating, lighting, ventilation, data and power installations, amongst others. This means acquiring an FHL could see between 20 per cent and 25 per cent of the purchase price qualifying for capital allowances, providing a significant tax shelter.
This can be particularly lucrative for higher and additional rate taxpayers who can set the relief against their rental profits at 40 per cent or 45 per cent. It should also be kept in mind that the annual investment allowance, which provides 100 per cent tax relief in the year of expenditure, will generally be available meaning full relief can be taken upfront and tax liabilities significantly lessened.
If you haven’t claimed capital allowances in the past, all is not lost. Claiming capital allowances now on historical expenditure could provide a windfall for existing FHL investors. A recently completed claim realised an unexpected £75,000 tax windfall for a client who had purchased his property in 2018 and was unaware of the capital allowances available. The client is now looking at a further purchase and, having had his eyes opened to the benefit, now views capital allowances as crucial to the investment case.
Any downsides? Not really, other than losses from a trade of letting furnished holiday accommodation can’t be set against general income. The losses may only be carried forward against future profits from the same FHL business, which restricts flexibility.
With the market booming and developers unable to build properties quick enough, FHL businesses could be in for a bumper year and a no-strings bonus from HMRC. A place to go on holiday that also provides tax relief…what could be better than that?