Update 30 October 2024 – Following the Budget announcement today, some of the details mentioned in this insight may have changed. Please visit our Budget page for further information.
Capital allowances is a tax relief that allows businesses to offset the cost of certain expenditure against its taxable profits. It has been eroded by previous governments offering little scope for residential investors.
But, our expert Liam Henry says, the boom in domestic holidays in 2020 predicted to continue into 2021 has seen a renewed interest in furnished holiday lets. Property investors and often their advisers often wrongly assume capital allowances are not available in respect of such properties due to them often being managed much like normal residential dwellings.
The capital allowances regime has the potential to offer investors in holiday lets considerable tax savings but certain criteria must be met to qualify.
Firstly, a property must qualify as a furnished holiday let. This means that it must be furnished for occupation, available to rent for at least 210 days a year and actually let for 105 days. Individual lets must be under 31 days.
Capital allowances are potentially available on both a new build properties to be used as a furnished holiday let and an existing property that is being redeveloped or repurposed as a holiday home. The reliefs extend across many aspects of a build, from plant and machinery to white goods, and can contribute to a considerable reduction in taxable profits.
Claiming capital allowances on furnished holiday lets should not an onerous process with the appropriate professional support. Claims can extend to the building’s plant together with the sanitary ware and certain fixtures and fittings. Claim values can quickly increase if a building is using solar or ground/air source heating or is built to a high specification. Capital allowances will not extend to all aspects of the build and specialist advice is essential.
Where significant refurbishment and/or building works have been undertaken it is generally helpful if a detailed schedule of works and expenditure can be obtained from the appointed construction company. This will allow an accountant to more easily and accurately identify capital allowances claims.
It is also possible to claim capital allowances on residential property that is to be redeveloped or repurposed as a furnished holiday let. This does however often present different challenges for investors and their advisers to consider.
Capital allowances claims are not time restricted, meaning that a claim can be made at any point in time. An investor will first need to demonstrate that capital allowances have not already been claimed and this will require a review of the previous history of the property.
Depending on the previous history of the property, it may be necessary for the seller to meet certain requirements in order for a claim to be possible so, where practical, it is always best to seek expert advice in advance of exchanging on a purchase to ensure the opportunity to claim capital allowances is not inadvertently lost. On occasion, the capital allowances position can also be used as negotiating factor when agreeing the purchase price.
The value of capital allowances will vary enormously depending on the build costs and specification but can exceed 25% of the purchase and refurbishment costs on a new holiday let project.
To put this in context, for a purchase costing £550k with subsequent development expenditure of £250k, the available capital allowances could amount to £200k, which for an additional rate tax payer would mean tax savings of up to £90k.
It is a relief that should not be overlooked!
Capital allowances can be a complex area. Everyone’s situation is different and getting advice that is tailored to your unique situation can ensure that your affairs are as tax efficient as possible. We offer a free initial consultation, so if you would like to speak to Liam Henry, please get in touch with him direct or call +44 (0)330 024 3200 or email hi@hhllp.co.uk.
