Different rules for capital allowances apply to furnished holiday lets compared with other residential letting. How can you make the most of them?

Property rental businesses

Generally, it doesn’t matter what type of property you let, you’re entitled to a tax deduction for the costs of running your rental business. The exception to this rule is the cost of capital items such as equipment. These qualify for capital allowances (CAs). But if the property is residential you can’t claim CAs for equipment etc. used by the tenant unless the property qualifies as a furnished holiday let (FHL).

CAs or no CAs?

CAs are tax deductions allowed instead of depreciation shown as an expense in your rental business accounts. If you have an FHL you can claim them for equipment such as cookers, beds, TVs or other furnishings. The trouble is your property might qualify as an FHL one year but not the next.

Trap. If your property ceases to qualify as an FHL, you must work out the CAs for the last year that it did as if you had stopped letting it altogether. You must put a value on all the items which you’ve claimed or could claim CAs on and deduct that from the value for tax purposes, i.e. the cost of the item less the CAs you’ve claimed. The difference, if positive, is an extra tax allowance, and if negative is taxable as income.

Example. Jack lets a property that qualifies as an FHL for 2021/22, but not for 2022/23. It qualifies as an FHL again in 2023/24. At the end of 2021/22 the value of items on which Jack has claimed CAs is £6,000. The total cost of items for which CAs have been claimed was £18,000. Jack claimed for all of this which means that the value for tax purposes is zero (£18,000 cost less CAs claimed £18,000). Deducting the £6,000 from this produces a negative figure which is therefore taxable as income for 2021/22. When the property qualifies as an FHL again (2023/24) Jack can again claim CAs for any of the capital items that are still in the property. The trouble is if they have devalued he is only entitled to claim CAs for the devalued amount.

Non-FHL periods

In our example 2022/23 is a non-FHL qualifying year. Jack isn’t entitled to claim any tax deduction for the items that previously qualified for CAs. What’s more, if he purchases new items he can’t claim capital allowances for these either. However, he will be entitled to claim CAs for both old and new capital items when the property again qualifies as an FHL. The trouble is that all the items will have depreciated meaning that he won’t receive as much tax relief.

Tip. A special concession might allow Jack to treat the property as an FHL for 2022/23 despite it not meeting the qualifying conditions. This would prevent Jack from losing out on CAs. Jack must send a formal election to HMRC if he wants to take advantage of the concession.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.