Do you own a furnished holiday let (FHL) such as a property on Airbnb? HMRC treats furnished holiday lets as a trade, so you could get thousands back in tax through a capital allowances claim. Research shows that around 96% of UK businesses are not claiming their full entitlement to capital allowances tax relief. Why not be part of the 4% who don’t miss out on unclaimed tax relief opportunities? Capital allowances are a highly specialist and often complex area of tax. The residence property management team at Flex Living commonly liaise with capital allowance tax experts and accountants, so we’ve put together this quick guide on capital allowances and where you can source help for a claim.
In this article, we are going to discuss :
What Are Capital Allowances?
Capital allowances are a form of tax relief you can claim on certain types of capital expenditure. This includes items that you buy to keep your business functioning, also known as ‘plant and machinery’. You can find out what expenses qualify for capital allowances on the UK Government website. Items purchased for a functioning and furnished holiday let are business expenses, which means you can claim them as tax-deductible and thereby reduce your taxable profit within your basis period (that is, the period for which you are charged tax in a given year).
What Are Plant and Machinery Capital Allowances?
Plant and machinery are the most commonly claimed capital allowances; they are the most relevant for furnished holiday lets. While you might think plant and machinery refer mainly to heavy machinery or equipment used in factories and industrial units, it also refers to any asset used inside a furnished holiday let that keeps it functioning as a business.
Plant and machinery items in properties can range from furnishings (e.g., fridges, freezers, couches and tables) to electrical wiring and water pipes. These items are necessary for your holiday let to function, that is, to keep your ‘business’ running smoothly.
How Much Tax Can You Save From Capital Allowances?
Capital allowance shrinks your taxable income, thereby lowering the amount of tax you have to pay in a given year. In the following example, we’ll look at how many years you will not have to pay income tax after finding you have £126,000 worth of capital allowances in your property that is worth £400,000.
|Rental income per year||£25,000|
|Running costs per year||Agency fees (10%): £2,500
Maintenance costs: £700
Other expenses: £250
Total costs: £3,450
|Profits before tax||Rental income - Costs
£25,000 - £3,450
|Capital allowances value||£126,000|
|Years paying no income tax (assuming profit is the same each year)||~ 5 years|
|Year||Capital allowance remaining||Taxable income|
|1||£126,000 - £21,550|
|2||£104,450 - £21,550|
|3||£82,900 - £21,550|
|4||£61,350 - £21,550|
|5||£39,800 - £21,550|
£6,750 (partial offset)
Under the ‘annual investment allowance’, you would be entitled to £1m immediate relief (up until March 2023 only; after March 2023 the AIA amount is set to return to £200,000). So you can deduct the full value of capital allowances from your profits before tax.
If you do not qualify for the annual investment allowance, you will have to ‘write down allowances’ (i.e. the relief is given gradually over several years). See this article for the different rates you may be able to claim your capital allowances (the rate you can claim will depend on the type of items and when you bought them).
Our best advice:
To get an estimate of your tax savings from capital allowances, we recommend getting in touch with qualified tax experts, such as HMA tax and Go Zeal, who specialise in capital allowances for furnished holiday lets. These companies can submit a claim to HMRC on your behalf and tell you exactly how much tax you can save.
What Counts as Furnished Holiday Let Capital Allowances?
If you own a furnished holiday let (considered a ‘trade’ by HMRC), you could be eligible to claim capital allowances tax relief up to 40% of the property purchase price. With an FHL, you can claim capital allowances on loose or fixed household equipment, fixtures, furniture or anything else necessary for the routine running of your property as a holiday let.
Loose items include:
- furniture such as couches, tables, chairs and beds
- furnishings such as curtains, cushions and lamps
- fridges, freezers, washing machines, dishwashers
- appliances such as kettles, microwaves and televisions
Fixed items include:
- plumbing and water pipes
- electrical wiring
- heating systems
- repaired/replaced windows, doors and boilers
- handles and locks on doors
The current Annual Investment Allowance (AIA) sits at £1 million. So, provided your total spend is less than £1m in a year, you are entitled to a full deduction against your rental profits. (Note: in April 2023, the AIA figure will reduce back to a maximum spend of £200,000 on all eligible assets qualifying as plant and machinery).
Important to remember:
- You cannot claim capital allowances for your FHL when it is occupied by friends or family, only when occupied by guests.
- You also cannot claim property modifications and improvements or the capital element of your mortgage repayment.
- You can only claim the AIA in the year the asset is purchased
Does Your Furnished Holiday Let Qualify?
Make sure you’re aware of the fine print tax rules. Your property needs to meet very specific criteria to meet the furnished holiday let criteria for tax purposes.
Your property will qualify as a FHL for tax purposes if it is:
- in the UK or the European Economic Area (EEA)
- furnished with adequate furniture for guests
- commercially let out with the intent to generate profit
It must also meet the conditions of occupancy:
- must be available to let for 210 days per year
- must be let commercially as furnished holiday accommodation to the public for at least 105 days in the year
- if it is occupied for over 31 days by the same tenants, there must not be 155 days or more of these longer lettings in total across the year.
Common Mistakes When Calculating Capital Allowances
There are some key things to watch out for when calculating your capital allowances. Make sure:
- the claim is made at the right time (i.e., in the first year of buying the assets)
- the assets are owned under capital allowances rules by the business at the time the claim is made
- the qualifying spend amount claimed is accurate
- the correct rate of relief is claimed
Consult the HMRC’s capital allowances toolkit for a full list of 28 errors commonly seen when processing plant and machinery allowances claims.
Who Can Claim Plant and Machinery Capital Allowances?
Any commercial property owner can claim capital allowances. This includes legal tax paying entities such as sole traders, partnerships, limited companies and furnished holiday let owners. Whether you can claim the types of capital allowances for a home or dwelling depends on whether the property is considered commercial (i.e., a FHL)
Where to Book a Capital Allowances Surveyor
To calculate your furnished holiday let allowable expenses, you need to use specialist tax services and surveyors to total up the cost of all items purchased for your FHL business throughout the year. Embedded capital allowances usually amount to 20%–40% of the property’s original purchase price. We recommend the following companies to uncover hidden tax savings in your furnished holiday let:
HMA tax – You can book a consultation with an expert at HMA tax who will prepare a capital allowances estimation for you. There are no upfront fees – if HMRC doesn’t accept their claim, they won’t charge you.
Wandsworth Consulting – Tax advisors check if you have a valid claim, conduct property surveys, prepare cost analyses and negotiate a settlement with HMRC to confirm the validity of your claim so you can claim tax relief.
Go Zeal – Tax experts find between 20% and 40% of the cost to buy or build a property will qualify for capital allowances. Their average tax saving per property is about £35,000.
FHL tax – Experts in finding hidden tax relief by identifying and valuing capital allowances in your furnished holiday lets.
Capital Allowance Review Service – Expert team who specialise in reducing tax liabilities will work with you to establish whether a capital allowances claim is possible and subsequently deal with HMRC to submit a claim.
Elect – Use up-to-date technology and valuation techniques to provide accurate capital allowances claims and consultancy.
THP Chartered Accountants – Provide a free initial review, conduct research into your property, prepare reports and submit a claim to HMRC for potential tax relief.
Why can’t I just leave it up to my accountant?
Capital allowances calculation is not necessarily a service that all accountants provide. This is because the process involves the skills of specialist surveyors and capital allowances experts.
Do Capital Allowances Work With Managed Properties?
Yes – Flex Living manages numerous properties. Unlike many traditional holiday let agents, our dedicated team do all the organising and hard work at no extra cost while landlords can benefit from capital allowances. To find out more about how you could benefit from our residence property management services, contact us today.
Want to know more about furnished holiday let allowable expenses? See our article on Furnished Holiday Let taxes.