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Furnished Holiday Lets – tax free income anyone?

Because of the changes to tax relief on interest payments for buy to lets ‘B2L’ many are left looking for ways to improve the tax efficiency of their investments. For those lucky enough to have rental properties in areas with demand for holiday lets there is a highly tax efficient alternative to B2L.

With the ability to claim tax relief on fixtures Furnished Holiday Lets can potentially deliver a tax free income for many years without engaging in anything that could be seen as provocative to HMRC. Read on and we shall explain how this is possible.

Properties within the European Economic Area ‘EEA’ that fulfil the criteria are classed under UK taxation as Furnished Holiday Lets ‘FHL’. The main points of the criteria are listed below.

  • The Property must be based in the EEA (https://www.gov.uk/eu-eea for list of EEA countries)
  • Available to rent for at least 210 days per year
  • Actually let for at least 105
  • Generally short lets (<31 days)

Please note these are just the main criteria, detailed guidance is available on www.gov.uk

Compared to B2Ls successful FHLs are generally a higher revenue/higher running cost investment. This article is not focused on the commercial elements of this business, however needless to say like B2Ls, with the right property in the right location and with the right team around you there are returns to be made. Of course the inverse is also true. What we are interested in here is the tax benefits of this area of property.

Let me state straight away that FHLs are exempt from the proposed changes to higher rate interest relief announced in the summer budget. Whilst this is great news it gets even better!

What is not generally known is that a FHL is able to claim capital allowances ‘CA’ on plant and machinery used within the business. This not only covers the loose plant (e.g. furniture, white goods etc) but also extends to the fixtures and integral features in the building (sanitary ware, electrics, heating, fitted carpets etc).

CAs are a form of tax relief given on eligible items of plant and machinery. They reduce your taxable profit and therefore the amount of tax you pay. They are generally given over time in a similar way to depreciation in accounting. CA can also be accelerated for recent expenditure using the Annual Investment Allowance ‘AIA’ (the AIA is currently £200k per annum). This means that in most cases the tax relief is all given in year one rather than bit by bit over a number of years.

So coming back to our FHLs, a proportion of the purchase price of a property is deemed to have been to pay for the fixtures that were in place at the time. You are perfectly entitled to claim CAs on these regardless of how long ago the purchase was, unfortunately valuing them in a way HMRC will accept is not straight forward! A claim on these items involves calculating an apportionment (effectively the ratio between the items you can and the items you can’t claim) of the purchase price. Due to the cross discipline nature of the work (tax and surveying) this requires a specialist firm like STax to undertake the work.

The size of these claims can vary greatly depending on the quality and quantity of items installed, however for FHLs they average around 25% of the purchase consideration, so £125k of allowances for a property which cost £500k. With the AIA at the elevated level it is, this can create a massive reduction in your taxable profit or even trigger a tax rebate in some cases.

Imagine a successful FHL that yields 5% taxable profit before allowances. The property was purchased for £500k in 2015 and a CA survey was conducted and a claim for £125k of CAs made. This gives us taxable profits over time as below.

201520162017201820192020
Purchase consideration£500,000£500,000£500,000£500,000£500,000£500,000
Profit %5%5%5%5%5%5%
Profit ££25,000£25,000£25,000£25,000£25,000£25,000
Capital Allowances ‘CA’-£125,00000000
Loss brought forward fromn/a-£100,000-£75,000-£50,000-£25,000£0
Taxable Profit (Profit less CA and historic losses)-£100,000 [e.g. 25k – 125k]-£75,000-£50,000-£25,000£0£25,000
Tax payable£0£0£0£0£0£25k x IT rate

In this example we have assumed the allowances are fully covered by the AIA.

As you can see no tax is payable until year six by which time the FHL owner has netted £125k of income with no tax due.

The combination of availability of CAs with the exemption to the changes for higher rate tax relief on interest makes FHLs a very attractive alternative to B2L, of course you do need the right advisors in place.

STax (www.STaxuk.com) are real estate tax advisors. We are a professional firm combining qualified tax advisers, accountants and surveyors. This makes us perfectly positioned to assist you in this area or any other real estate related tax matter.

So if you are looking to change your B2Ls to FHLs, buy new FHLs or simply claim on those you have had for a while, please contact us today for a free appraisal of your position. We charge our fees as a percentage of the benefit we deliver, no allowances, no charge.

 

Andrew Stanley
Managing director

STax (Stanley Tax Associates Ltd)
24 Greville Street
London, EC1N 8SS

7 Queen Square
Brighton
BN1 3FD

Email: [email protected]
Web: www.STaxUK.com
Tel: (0) 20 7147 9940
Fax: (0) 330 133 0903


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Details correct when this article was originally posted on July 23, 2015.