This article first appeared on This is Money– please click to view it.
Do I need advice from a specialist tax adviser in order to claim capital allowances before the abolition of the Furnished Holiday Let tax regime in April 2025?
I have been assured by several companies specialising in FHL capital allowances that the application process is complex, requiring either all or some of the following: a surveyor’s report, photographic evidence, an inventory of eligible tax deductible items, and the completion of relevant (undisclosed) forms for submission to HMRC.
My FHL started trading in August 2024 after extensive renovations for which I can provide invoices and bank statements.
Specialist tax advisers charge a commission of between 3-5 per cent of the amount of capital allowances claimed and I would be faced with a hefty bill for tax advice.
This could be a waste of money as so far trading has been very erratic and apart from not being very profitable I am currently doubtful the property will even achieve the 105 days of letting required in a tax year to actually qualify as a furnished holiday let.
If, in your opinion, expensive specialist tax advice is not essential, how would I apply for FHL capital allowances independently before April 2025?
I searched on the HMRC website but can’t find anything relevant, possibly the SA105 form, but I’m not sure.
Apart from all this, I understand that I would be exempt from income tax for this first year of trading anyway if I apply for an Annual Investment Allowance.
In addition, after I’ve experienced an entire annual FHL cycle, I will decide whether it’s all been worthwhile and whether to revert to letting the property on a standard tenancy agreement.
If I do stop trading as a FHL would an expensive FHL capital allowance application subsequently be redundant should I at any point in the future go back to trading as a FHL again?
I’ve emailed HMRC directly to see if anyone can answer these questions but without any response. The April 2025 deadline for the abolition of the furnished holiday lettings tax regime is fast approaching and your thoughts on this increasingly topical issue would be greatly appreciated.
Heather Rogers replies: A Furnished Holiday Let is a property rented out for short periods.
They have always been treated very differently for tax purposes from standard rented property.
This is because FHLs have always been treated as a business, as opposed to a return on an investment, which is how rental income is normally treated.
For that reason. FHLs have been able to claim allowances and been subject to tax reliefs that residential rental properties do not qualify for.
However, all that is about to change, starting from 6 April 2025 for individual owners, and from 1 April 2025 for company owners.
I will explain the current system and the new rules to help you and other readers understand broadly what is involved, and then come to your particular circumstances as the end.
However, I want to make clear upfront that I do believe owners of FHLs need to take detailed individual advice about this as soon as possible from a suitably qualified accountant.
You can go to a general accountant with experience of FHLs first, and they can then tell you if you need specialist help. My guide to finding a good accountant is here.
What qualifies as a FHL?
A FHL has a statutory definition. To qualify as a Furnished Holiday Let, your property must be:
– Situated in the UK or European Economic Area
– Furnished
– Let on a commercial basis; you must be aiming to make a profit
– Available to be let out to the public for at least 210 days (30 weeks) per year
– Rented out to the public for at least 105 days (15 weeks) of the 210 days available – this does not include private or discounted use by family or friends, or time that it is occupied by the owner.
If the property is let to the same person for more than 31 days, there should be no more than 155 days (22 weeks) of ‘long occupation’ in that year. If the total of all lettings that exceed 31 continuous days is more than 155 days during the year, this condition is not met so your property will not be a FHL for that year.
More information on the occupancy rules for FHLs can be found here.
Your property will no longer be a FHL if the property is:
– Sold
– Used for private occupation
– Not meeting letting conditions, even with the averaging and period of grace elections explained in the link above.
If your property does not qualify as a FHL or stops being a qualifying FHL, the special tax treatment will no longer apply. You’ll need to work out any balancing allowance or balancing charge for capital allowances.
How is the tax treatment of FHLs going to change?
Most of the new rules bring FHLs into line with ordinary residential letting for tax purposes. In other words, they will no longer be treated as a business but as a return on investment.
The new rules include the following.
– Tax relief available on loans taken out to purchase or refurbish a FHL will be restricted to only 20 per cent basic rate tax for individual owners; companies will still be able to offset the full cost of the interest.
– Income from FHLs will no longer count as relevant earnings for pension contributions.
– It will no longer be possible to claim capital allowances on capital expenditure (there is more on this below).
– Any fixtures or furniture items purchased in the future will be restricted to ‘replacement of domestic items relief’ in line with other property rental businesses – in other words, you can claim the cost of a replacement.
Meanwhile, FHLs will no longer qualify for Business Asset Disposal Relief (BADR).
BADR means that sales of business assets are taxed at a lower rate of capital gains tax, currently 10 per cent. BADR is set to increase to 14 per cent from 6 April 2025 and 18 per cent from 6 April 2026.
However, from 6 April 2025 capital gains tax will be applied to sales of FHLs at the rate of 18 per cent if you are a basic rate taxpayer, and 24 per cent if you are a higher or additional rate taxpayer, or the amount of the gain takes you into those higher tax brackets. This will bring the rates into line with those for residential let property disposals.
You can still claim all the other normal expenses that you incur.
However two interim measures assist with the change from one taxation treatment to another.
First, any FHL businesses with an ongoing unclaimed capital allowances pool (find more on this below) will be able to continue to claim writing down allowances under the new rules until the pool is used up.
Second, if the FHL business ceases before the new measures are introduced and the property is sold within three years then BADR will be available.
Under the new legislation any losses made by a FHL business can be offset against any profits from any other rental profits.
But you cannot set the losses of one FHL business against the profits of the other if you have a UK and an EEA business.
I also understand there will be anti-forestalling legislation to prevent the BADR being claimed where an FHL property business is sold but the sale does not complete until after 5 April 2025, meaning that the new rules will apply to the sale.
What are capital allowances?
Capital allowances are reliefs for your capital expenditure. The majority of equipment purchased will be put into pools, which means types of expenditure that are grouped together.
The main pool typically includes most plant and machinery used in a FHL business. The main pool qualifies for the Writing Down Allowance at a rate of 18 per cent per year on a reducing balance basis. (Reducing balance means depreciation is taken into account over time.)
Examples could include: furniture, cleaning equipment, portable lighting, kitchen installations and bathrooms. The rate applicable is 18 per cent.
The special rate pool includes assets that have a slower depreciation rate and qualify for the WDA at a rate of 6 per cent per year on a reducing balance basis.
Examples could include: non portable lighting, heating systems/air conditioning, solar panels, electrical work and long-life assets, such as equipment with an expected business life of 25 years or more. The rate applicable is 6 per cent.
You may also be able to claim some of the capital expenditure under the Annual Investment Allowance, where you claim 100 per cent in the year in which the expenditure occurred. It only applies to new, rather than any second hand assets.
A note for property purchasers! If when you purchased the property where an election is made to fix the amount allocated to fixtures on the sale of a property, HMRC has confirmed that the expenditure allocated to fixtures will not qualify for capital allowances where the purchaser of the property is concerned.
Gov.uk has more information about capital allowance pools here and on the abolition of the furnished holiday lettings tax regime here.
What about your situation?
The changes start in April but in your case, as your FHL started trading in August 2024, your first year with regard to ascertaining whether your property qualifies as an FHL will not be up until the end of July 2025.
Therefore, you may not find out whether you can meet the occupancy rules until after the new rules come into force.
However, don’t worry as HMRC have confirmed that the period to determine occupancy will go on for the 12 months providing you start your business on or before 5th April 2025.
Remember if your property does not qualify as a FHL in that time then it has to be treated as a normal residential property, even under the old rules.
If it does qualify in the 12 months to July 2025, then capital allowances would be available for you to claim for that expenditure which has been incurred before 5 April 2025.
If a your property doesn’t qualify as a FHL or stops being a qualifying FHL, and becomes a long term rental, then you will need to work out any balancing allowance or balancing charge regarding residual capital allowances.
Any claim for capital allowances would be made on an SA105 form at the moment.
I can’t give an opinion on whether a FHL capital allowance application might turn out to be redundant or not because your year isn’t up until July.
Even if the property doesn’t qualify as a FHL, any works carried out which added value to it would be available to be offset against any capital gain if you dispose of it in future.
As I said above, I do suggest you take advice from a suitably qualified accountant about your situation as soon as possible, because they will be able to answer your questions in detail.