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Many furnished holiday let (FHL) owners are unaware of the potential tax savings they can access through capital allowances (CAs). With high interest rates and rising property maintenance costs, it's crucial for holiday let owners to take advantage of available tax incentives.
After the 2023 Spring Budget, this scheme became one of Europe's most generous tax incentives, making it an opportune time to harness its benefits. Whilst we recommend seeking specialist support to navigate the complexities of capital allowances, we have compiled key insights below, with the support of capital allowances experts at RCK Partners, to help you understand the scheme and its advantages.
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Understanding capital allowances for furnished holiday lettings
Capital allowances are the primary form of tax relief for businesses and individuals with commercial properties. This can include holiday lets if they meet the criteria of an FHL. They enable you to deduct the value of specific assets from your profits, reducing your tax liability.
Relevant capital expenditure
Understanding which types of property improvements and works qualify for capital allowances is crucial. Capital allowances cover fixtures, fittings, integral features, and more, within an FHL property. Other tax-deductible items include embedded systems like wiring, plumbing and ventilation, as well as soft furnishings, tech and furniture. Recognising qualifying expenditures can aid budgeting and cashflow projections – particularly if you are building or renovating a property for the purpose of holiday letting.
Claiming capital allowances for furnished holiday lets
Claiming capital allowances in a compliant manner, considering the various aspects of property development, can be complex. Expertise in tax case law and property construction is vital when claiming capital allowances. A specialist survey of a property is required to identify/quantify all claimable items that are often hidden and embedded within a property. This allows homeowners to maximise their tax savings and ensure transparent reporting to HMRC.
Qualifying for capital allowances
To be eligible for capital allowances, a furnished holiday let must meet specific criteria:
1. The holiday let property must be in the UK or European Economic Area (EEA).
2. The holiday let property must be furnished.
3. It must be commercially let with the intention to make a profit.
4. The property must be available for commercial letting as holiday accommodation for at least 210 days in a tax year.
5. Out of those 210 days, the property must be let for 105 days or more as holiday accommodation.
6. Long-term occupation (31 days or more) must not exceed 155 days in the tax year, and this period cannot count toward the 105 days of commercial holiday letting.
Meeting these criteria qualifies the furnished holiday let as commercial property under the scheme, making the assets within it tax deductible, whereas residential units do not qualify.
Importance of timing for capital allowance claims
The timing of capital allowances claims can significantly impact the potential tax relief available on FHLs. For instance, ‘full expensing’, introduced in the 2023 Spring Budget, allows companies to claim 100% of qualifying plant and machinery investments in the year the expenditure was incurred. Similarly, the Annual Investment Allowance (AIA) and super-deduction have time-sensitive elements, affecting when and how much you can claim.
Therefore, any homeowners that have spent money on their holiday lets in the last 3 years, now is the time to speak to an expert.
Claiming historical capital allowances
You can claim historical capital allowances indefinitely, but they may be received as Writing Down Allowances (WDAs) for expenditures incurred more than 3 years ago. Seek advice from a capital allowances specialist when exploring historical costs due to changing tax laws and regulations.
Writing Down Allowances (WDAs)
WDAs let you deduct a percentage of an asset's value each year, depending on its pool classification. Pools include the Main Rate Pool, Special Rate Pool, and Structures & Buildings Allowances (SBAs). WDAs help spread tax relief over an asset's useful life, reducing tax liability in subsequent years.
More historic expenditures, outside of the past 3 years, qualify for the Writing Down Allowance – this allows the homeowner to receive the full allowances over time.
Claiming capital allowances for property acquisitions
Acquisitions require an entitlement check to determine eligibility. Furnished holiday lets often have a history of residential use, meaning the current homeowner can enjoy an unrestricted claim, often up to 30% of the purchase price paid.
Expected savings for furnished holiday lets
Up to 80% of construction and renovation costs can qualify for tax relief when assessed by an expert. Qualifying percentages for furnished holiday let acquisitions can be as high as 30% of the purchase price.
Examples
Acquisition of holiday let: £1m spent, with up to £300,000 allowances. Homeowner tax savings between £57,000 (19% tax) - £135,000 (45% tax).
Refurbishment or development of holiday let: £1m spent, with up to £800,000 allowances. Homeowner tax savings of £152,000 (19% tax) - £360,000 (45% tax).
Impact of business registration on claims
The type of business registration can affect the scope of capital allowance claims on FHLs due to the different rates of tax paid by individuals (20%-45%) and companies (19%-25%). Seek advice from a capital allowance specialist to advise you on these differences.
Information needed for capital allowances claims
For renovations or fit-outs, you'll need invoices or a fixed asset register, as well as tax documents from your accountant. Property acquisition requires documents like Property Valuation/Building Survey Reports, Sale and Purchase Agreements, Commercial Property Standard Enquiries (CPSE), and Land Registry Documents.
Additional considerations
Capital allowances claims are intricate, and misqualification or underclaiming can lead to HMRC inquiries. Each business' unique context impacts how capital allowances can be leveraged.
Multiple properties provide more opportunities for capital allowance claims, but each property requires individual analysis to ensure compliance.
Utilising the expertise of a specialist capital allowances provider will reduce the risk of any dealings with HMRC following a claim.
This article was developed with the support of RCK Partners, a capital allowance specialist with in-depth knowledge of the capital allowance scheme. They have a track record of generating tax savings via capital allowance for FHL owners. Importantly, they charge a contingency fee 'on success,' ensuring no risk when exploring this opportunity.
Get in touch with holidaycottages.co.uk today to find out more about holiday letting, and how we can help you maximise your property's potential.