Due to changes made by the Conservative Budget of March 2024 it is important to take immediate action to establish whether you are entitled to make a capital allowances claim for a furnished holiday let. Even if your furnished holiday let was let for only one night in the 24/25 tax year it is still possible to claim capital allowances, provided the property qualified within the twelve month anniversary of that date of first letting. This information was provided by HMRC in response to a question posed by the Institute of Chartered Accountants of England and Wales (ICAEW).

The information in this blog is based on guidance taken from the HMRC’s website. However the reason that we are interested in talking to Furnished Holiday Let (FHL) owners is that in most cases they have not claimed for the “Plant and Machinery Fixtures” within their properties. i.e. assets such as the heating, electrical systems and sanitary ware etc.

As an example if you paid £400,000 for your FHL the capital allowances will be in the general region of £100,000 i.e. 25% of the original purchase cost. This would equate to a tax saving over time of £20,000 for a 20% tax payer or £40,000 for a 40% taxpayer.

Please complete our Capital Allowances Claims Estimate Form if you would like an estimate of your likely capital allowances benefits. There is no downside to making a claim if your paying sufficient tax on profits from your furnished holiday lets business.

Special Tax Rules for Furnished Holiday Lets

There are special tax rules for rental income from properties that qualify as Furnished Holiday Lettings (FHLs).

If you let properties that qualify as FHLs:

• you can claim Capital Gains Tax reliefs for traders (Business Asset Rollover Relief, Entrepreneurs’ Relief, relief for gifts of business assets and relief for loans to traders)
• you are entitled to plant and machinery capital allowances for items such as furniture, equipment and fixtures which would include such items as heating and electrical systems and sanitary ware.
• the profits count as earnings for pension purposes

To benefit from these rules, you will need to work out the profit or loss from your FHLs separately from any other rental business.

Accommodation that qualifies as a FHL

To qualify as a FHL your property must be:

• in the UK or in the European Economic Area (EEA) – the EEA includes Iceland, Liechtenstein and Norway
• furnished – there must be sufficient furniture provided for normal occupation and your visitors must be entitled to use the furniture

The property must be commercially let in that you intend to make a profit. If you let the property out of season to cover costs but do not make a profit, the letting will still be treated as commercial.

All your FHLs in the UK are taxed as a single UK FHL business and all FHLs in other EEA states are taxed as a single EEA FHL business. You will need to keep separate records for each FHL business because the losses from one FHL business cannot be used against profits of the other.

Occupancy conditions

Accommodation can only qualify as a FHL if it passes all 3 occupancy conditions set out below.

How to use the occupancy conditions

• for a continuing let, apply the tests to the tax year – that is from 6 April one year to the 5 April the next
• for a new let, apply the tests to the first 12 months from when the letting began
• when your letting stops, apply the tests to the 12 months up to when the letting finished

The pattern of occupation condition

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 an FHL for that year.

The availability condition

Your property must be available for letting as furnished holiday accommodation letting for at least 210 days in the year (140 days for the tax year 2011 to 2012 and earlier).

Do not count any days when you are staying in the property. HM Revenue and Customs (HMRC) do not consider the property to be available for letting while you are staying there.

The letting condition

You must let the property commercially as furnished holiday accommodation to the public for at least 105 days in the year.

Do not count any days when you let the property to friends or relatives at zero or reduced rates as this is not a commercial let.

Do not count longer-term lets of more than 31 days, unless the 31 days is exceeded because something unforeseen happens. For example, if the holidaymaker either:

• falls ill or has an accident, and can’t leave on time
• has to extend their holiday due to a delayed flight

If you don’t let your property for at least 105 days, you have 2 options (known as elections) that can help you reach the occupancy threshold:

• the averaging election – if you have more than one property
• a period of grace election – if your property reaches the occupancy threshold in some years but not in others

Averaging election

If you let more than one property as a FHL, and one or more of these properties does not meet the letting condition of 105 days, you can elect to apply the letting condition to the average rate of occupancy for all the properties you let as FHLs. This is called an averaging election.

Example

Gary lets 4 UK holiday cottages in 2014 to 2015 for the following number of days:

If Gary uses averaging, all 4 cottages will meet the letting condition (421 days divided by 4 = 105). Without averaging, cottage 4 would not qualify.

You can only average across properties in a single FHL business – you can’t mix UK and EEA FHL properties together.

Time limit

You make an averaging election up to one year after 31 January following the end of the tax year. For example, if you are filling in your tax return for 2014 to 2015, you must make your election by 31 January 2017.

Period of grace election

You may genuinely intend to meet the letting condition, but were unable to. If this happens, you may be able to make a period of grace election that allows the property to qualify as a FHL as long as the pattern of occupation and availability conditions were met.

To make an election, you must be able to show that you had a genuine intention to let the property in the year. For example, where you have marketed a property to the same or a greater level than in successful years, or where the lettings are cancelled due to unforeseen circumstances, including extreme adverse weather.

You can make an election where the property met the letting condition in the year before the first year you wish to make a period of grace election (either on its own or because of an averaging election). If your property again doesn’t meet the letting condition in the following year, you can make a second period of grace election (as long as you made an election in the previous year).

If your property doesn’t reach the threshold by the fourth year, after 2 consecutive period of grace elections, it will no longer qualify as a furnished holiday letting.

How to make an election

You can either:

• use your Self Assessment ‘UK Property’ pages
• make it separately, up to one year after 31 January following the end of the tax year – for example, if you are filling in your tax return for 2014 to 2015 you must make your election by 31 January 2017

Using both averaging and period of grace

If you have more than one property, you can use both averaging and period of grace elections to make sure that a property continues to qualify as a FHL.

Example

Emma has 4 cottages that she lets as furnished holiday lettings. In some years cottage 3 doesn’t meet the letting condition.

Emma uses averaging in year 2 and period of grace in year 3 and 4 to make sure that cottage 3 qualifies for the whole period.

Property closed for part of the year or only part of the property let

If your property is only used as a FHL and is closed for part of the year because there are no customers, you can deduct all the expenses, such as insurance and loan interest, for the whole year, provided you do not live in the property.

If you let part of the property as a FHL, or where you use the property privately for part of the year, you need to apportion your receipts and expenses on a reasonable basis.

Property stops being an FHL

Your property will no longer be a FHL if the:

• property is sold
• property is used for private occupation
• letting condition is not met even with the averaging and period of grace elections

If your property does not qualify as an FHL or stops being a qualifying FHL, the special tax treatment will no longer apply. You will need to work out any balancing allowance or balancing charge for capital allowances.

What you can do with losses

If your UK FHL business makes a loss, you can set the loss against your UK FHL profits of later years. Similarly, if your EEA FHL business makes a loss, you can set the loss against your EEA FHL profits of later years. You can’t set the losses of one FHL business against the profits of the other if you have a UK and an EEA business.