FHL and Capital Allowances

A client recently bought a lovely cottage on the edge of the Peak District for approximately £180,000.

The property was previously the home of an elderly person and was in need of some modernisation but little structural alteration.

A modest sum was spent decorating the property and it has been successfully marketed since then as a furnished holiday let producing consistent rental income.

Having assessed the pattern of availability and actual letting, it is clear that the property will be a qualifying furnished holiday accommodation as far as HM Revenue and Customs guidelines are concerned.

Ordinary ‘Buy-to-Let’ businesses do not qualify for capital allowances. However qualifying furnished holiday letting businesses can qualify for capital allowances and this has a major advantage as can be seen below.

Taking the above client’s acquisition cost of £180,000 we needed to review the property to see what was purchased from a tax viewpoint. This is basically the shell of the property (bricks and mortar, etc), wiring, plumbing, heating, sanitary ware (integral features), garden outbuildings and other loose items that may be included.

The capital allowance rules for furnished holiday lettings allow us to claim capital allowances on the integral features that were acquired along with the property.

So we could calculate the value/cost of the integral features included within our £180,000 purchase price, a specialist survey was commissioned which identified the value of the integral features purchased, along with the property came to almost £45,000.

What this means is, when combining the capital allowance claim within an Annual Investment Allowance claim, we can set the full £45,000 against the furnished holiday lettings profit during the first year the property was let.

Clearly, a single furnished holiday let will not produce a profit of £45,000 and a loss will be realised which can be carried forward indefinitely for use against other furnished holiday letting profit.

In our client’s case, I have estimated that the profit from the business will be in the region of £10,000 per annum and therefore no tax will be paid on these profits until the full capital allowance has been utilised. Therefore, for over four years the income will be received tax free which will greatly increase my client’s cash flow for the years concerned.

There are many other tax advantages of running furnished holiday lettings and I would be pleased to review any potential purchase or your existing buy to let furnished holiday let business to ensure that these are being run as tax efficiently as possible.

Are you thinking about investing in property in 2019?

Yes – then consider furnished holiday lets over standard buy to let for these five tax advantages

  1. No mortgage interest restriction

It has been well publicised that from April 2017 residential finance costs (primarily loan interest) are no longer automatically a fully tax allowable expense for buy to let investors. For higher rate taxpayers tapered restriction now applies to limit the tax relievable finance costs.

With a qualifying furnished holiday let (QFHL) these restrictions do not apply and full tax relief (up to 45%) remains available on the full finance costs relating to the purchase and improvement of the property.

2. Capital allowances available

With buy to let property businesses capital allowances are usually not available. However, with a QFHL let capital allowances can be claimed on the costs of furnishings and other items on a similar basis to a hotel or guesthouse.

When combined with a claim for annual investment allowance on integral features, this can be a very valuable allowance that is often under claimed by furnished holiday let owners.

3. Profit treated as earned income

With a standard by to let business the profit is investment income for tax purposes. However furnished holiday let profit is deemed to be earned income, which has the following advantages.

  1. Being earned income, joint owners (including spouses and civil partners) may choose how to allocate the profit between them. This is very useful when joint owners are taxed at differing rates.
  2. Those saving for retirement, their furnished holiday let profit is “relevant earned income” for pension purposes thereby increasing the amount they can contribute.

Even though the profit is earned income there is no national insurance chargeable.

4. Entrepreneurs relief available on sale transfer

Entrepreneurs relief potentially reduces the tax rate on sale of a QFHL let property from 28% down to 10%. Standard buy to let businesses do not qualify for this valuable relief.

5. Holdover and rollover reliefs available