Furnished Holiday Lets

Some UK property owners have second homes, either in the UK, or within other European Economic Area countries. What many don’t know is that if these are let out furnished for at least part of the year they may well qualify for significant tax advantages. The most important tax advantage during the period of ownership is capital allowances, this can reduce part if not all the tax payable on rental income received from UK income tax or corporation tax.

For a property to qualify as a Furnished Holiday Let (FHL) for tax purposes it has to pass a number of criteria and tests.  In addition, the properties need to be located in the UK or the European Economic Area (EEA).

Often capital allowances are not claimed on qualifying FHL properties because the owner is not aware that they can or, due to the complexity of the legislation. If a FHL is let with a view to making a profit then it qualifies for capital allowances purposes as it is seen to be let on a commercial basis. It is worth noting lettings at undervalue rates to friends or family do not qualify as commercial lettings.

Capital allowances can be claimed in accordance with the Capital Allowances Act 2001 on what your business spends on certain assets that it owns and uses within the business providing certain conditions are met. They are available to sole traders, self-employed persons or partnerships, as well as companies and organisations liable for Corporation Tax. They aim to provide tax relief for the reduction in value of qualifying assets that you buy and own for business use by letting you write off their cost against the taxable income of your business.

Capital allowances are not the same as depreciation within the accounts as depreciation gets added back when calculating taxable profits. Capital allowances reduce taxable profits. Even if the property owner is aware that a property should qualify as a FHL, there is often confusion over what can be claimed and the value of the claim.

Capital allowances relief is available on expenditure incurred on plant and machinery (P&M), which includes P&M fixtures already installed in buildings when a property is acquired. Below are some examples of qualifying P&M:

• All loose furniture and equipment;
• Heating and air-conditioning installations;
• Electrical systems (dependant on when the expenditure was incurred);
• Fitted kitchens and bathrooms;
• Swimming pools.

Where the P&M was acquired as part of the overall property purchase price, the claim is based upon an apportionment of the purchase price. Apportionment claims require specialist valuations of what it would cost to buy the land and reconstruct the building at the date of purchase. On subsequent expenditure, details of the cost information will be required to be able to analyse the costs. Integral features attract capital allowances at the rate of 6% per annum, whilst all general pool P&M will be allowable at the higher rate of 18% per annum.  These writing-down allowances are given on a reducing balance basis.