The UK government's recent decision to abolish the Furnished Holiday Lettings (FHL) tax regime marks a significant shift for FHL owners, with notable implications for the treatment of capital allowances. This change will impact the ability to claim tax relief on certain property-related expenses, making it essential for FHL owners to understand the transition from the previous tax regime to the new framework. This article provides a comprehensive analysis of capital allowances for FHLs both before and after the abolition, addressing key considerations and providing clarity on the changing tax rules.
Overview of Furnished Holiday Lettings (FHL) and Capital Allowances
Furnished Holiday Lettings (FHL) refer to properties that are rented out on a short-term basis and meet certain criteria, such as being furnished, available for rent for at least 210 days per year, and actually let for a minimum of 105 days.
For detailed information regarding FHL and the tax benefits of FHL before abolition, go to HMRC website.
Capital allowances are a way for businesses, including FHL owners, to claim tax relief on the cost of certain assets they purchase for their business. These assets can include things like Furniture (e.g., sofas, beds, tables), Appliances (e.g., washing machines, refrigerators), Equipment (e.g., vacuum cleaners, dishwashers), Building improvements (e.g., energy-efficient upgrades).
By claiming capital allowances, FHL owners can reduce their taxable profits and, therefore, lower the amount of tax they owe.
For more information regarding capital allowances, go to HMRC website.
Under the current FHL tax regime, property owners can claim capital allowances on certain expenditures related to their property.
Capital Allowances Before the Abolition of FHL
Before the abolition, the FHL tax regime allowed owners to benefit from more generous tax treatment compared to standard rental properties. Capital Allowances is considered one of the notable benefits of FHL compared to other rental properties.
Delve into our article "Abolition of Furnished Holiday Lettings (FHL): What Individual Owners Needs to Know!".
Annual Investment Allowance (AIA)
The Annual Investment Allowance (AIA) lets you claim back the full cost of certain items you buy for your Furnished Holiday Lettings (FHL) business, all in the same year. This could include physical, movable assets like furniture, appliances, or equipment you use in the property.
You can claim up to £1 million worth of purchases per year. So, if you buy new furniture or equipment for your FHL, you can deduct the full cost from your profits, helping to reduce the amount of tax you pay. It’s a great way to save money on business expenses, especially if you’re investing in new items for your rental properties.
First Year Allowance (FYA)
The First Year Allowance (FYA) lets businesses claim a 100% deduction on the cost of certain energy-efficient or environmentally friendly items in the year they are purchased.
For Furnished Holiday Lettings (FHL), this means that if you buy energy-saving devices or eco-friendly equipment for your property, such as energy-efficient boilers, insulation, or solar panels, you can claim back the full cost in the same year. This can help lower your tax bill while making your property more environmentally friendly and potentially reducing running costs in the long term.
Written Down Allowance (WDA)
The Written Down Allowance (WDA) lets businesses claim tax relief on certain assets that don’t qualify for quicker tax relief, like the Annual Investment Allowance (AIA) or First Year Allowance (FYA).
For Furnished Holiday Lettings (FHL), if you buy assets that aren’t eligible for AIA or FYA (such as some improvements in the building, etc) or if you AIA of £1million has been exhausted, you can claim tax relief over several years instead of all at once. The standard WDA rate is 18%, which means you can claim 18% of the asset's value each year as tax relief. This helps reduce your tax bill over time.
Note: In the context of Furnished Holiday Lettings (FHL), some assets like integral features or long-life assets may qualify for tax relief under the Written Down Allowance (WDA), but they could be subject to a lower rate of 6% instead of the usual 18%.
- Integral features are things built into the structure of the property (e.g., plumbing, heating systems, electrical installations, and lifts)
- Long-life assets are items that are expected to last more than 25 years, like certain types of machinery or equipment.
For these types of assets, instead of writing off 18% of their value each year, you can only write off 6% of their value each year. This means it will take longer to fully claim the tax relief for these assets.
Capital Allowances After Abolition of FHL
The UK government has announced that the special FHL tax regime will be abolished in two phases, with changes taking effect on 6 April 2025 for Income Tax and 1 April 2025 for Corporation Tax. As a result, FHL owners will no longer benefit from certain tax advantages, especially concerning capital allowances.
Abolition of Capital Allowances for New Expenditures
- Following the abolition of the FHL tax regime, owners will no longer be able to claim capital allowances on new expenditures related to furniture, fittings, and other qualifying assets. These expenditures will be subject to the normal tax treatment applicable to residential property businesses meaning a loss of the annual tax deduction that previously helped offset taxable profits.
Transitional Provisions for Existing FHL Assets
- Any capital allowances claimed on assets used in FHLs prior to 6 April 2025 will be protected. For example, if an FHL owner has a pool of unclaimed capital allowances on fixtures and fittings at the time of the change, they can continue to claim writing-down allowances on that pool until the balance in the pool is exhausted.
- However, no new claims for capital allowances on assets will be allowed once the regime is abolished.
Shift to Property Business Rules
After the abolition, FHLs will be treated like other rental properties for tax purposes. This means FHL owners will no longer benefit from the special rules for capital allowances or the more favourable tax treatment available to furnished holiday lets.
The replacement of domestic items relief will apply to FHL owners, allowing them to deduct the cost of replacing certain household items (e.g., beds, sofas, and appliances) but without the flexibility of capital allowances.
Illustration representing Pre and Post abolition implications of Capital Allowances
Scenario | Before Abolition | After Abolition |
|---|---|---|
Capital Expenditure on Assets | £15,000 | £15,000 |
Capital Allowance Claim | £15,000 | £0 |
Rental Income | £25,000 | £25,000 |
Taxable Income | £10,000 | £25,000 |
Tax Rate | 20% | 20% |
Tax Liability | £2,000 | £5,000 |
Tax Saving (Due to Capital Allowance) | £2,000 | £0 |
What Should you do now?
You might want to take necessary actions before the abolition to take advantage of the current benefits of the FHL regime, as these will no longer be available. Some of the possible actions or steps that you could take involves:
Claiming Capital Allowances Before the Change
FHL owners who have not yet made a claim for capital allowances on fixtures and fittings have a limited window to do so before the regime is abolished. Any unclaimed allowances can be submitted before the deadline to maximise the potential tax relief.
Maximising Capital Expenditures Before Abolition
FHL owners should consider accelerating any planned capital expenditures on qualifying assets before the abolition. For example, purchasing new furniture or refurbishing the property can lead to claiming first-year allowances, which provide an immediate full tax deduction. Even where full tax deduction cannot be achieved (WDA can be claimed) but capital allowances can still be claimed on the capital expenditures made before the abolition date until the balance on the pool has been exhausted.
For more details on your options before and after the abolition, please read our article "Abolition of Furnished Holiday Lettings: Key Facts for Owners".
Conclusion
The upcoming abolition of the Furnished Holiday Lettings (FHL) tax regime represents a significant change for property owners who have previously benefited from generous capital allowance provisions. As the rules shift, it’s crucial for FHL owners to take action before the April 2025 deadline to maximise available tax relief. This includes claiming any unclaimed capital allowances on fixtures and fittings, as well as accelerating planned capital expenditures to make the most of the First Year Allowance and other benefits before the new tax treatment takes effect.
After the regime is abolished, FHL owners will face a less favourable tax environment, with no further claims allowed for new expenditures and a shift to the more restrictive rules for residential property businesses. To minimise the impact of these changes, it’s essential for owners to review their current assets, submit claims where possible, and consult with a tax professional to navigate the evolving landscape effectively. By planning ahead, FHL owners can ensure they take full advantage of the capital allowances available under the current system, providing immediate savings and a smoother transition to the post-abolition tax framework.
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