Since 1984, generous special tax breaks have existed for furnished holiday lettings (FHLs) which, amongst other tax benefits, have allowed owners to offset expensive costs of fixtures, furniture and equipment. However, changes outlined in the Spring 2024 Budget will see this benefit abolished from 6 April 2025 with ‘replacement of domestic items relief’ available instead.
Capital allowances: understanding the FHLs special tax treatment
Capital allowances are a tax relief which businesses can claim on eligible expenditures such as plant and machinery allowances for fixtures. And since 1984, the capital allowances scheme has offered generous special tax breaks for FHLs.
But what qualifies as a FHL? For the purposes of the scheme, a FHL is defined as a furnished holiday accommodation which broadly meets three conditions each year:
- it must be available to the public for letting at least 210 days (the ‘availability’ condition);
- the accommodation must be let for at least 105 days (the ‘letting’ condition); and
- the total of all continuous lettings exceeding 31 days (called ‘longer-term’ occupation) cannot exceed 155 days (the ‘pattern of occupancy’ condition).
What expenditure currently qualifies for the FHLs tax treatment?
A key benefit of the treatment is that FHL owners may claim generous tax relief for expenditure on plant and machinery fixtures in the property when it is purchased, or those which are installed into the property during refurbishment works.
This would typically include costs for:
- heating
- hot and cold water systems
- electrical power and lighting
- sanitary appliances and fittings (e.g. sinks, showers and baths)
- kitchen fittings such as cupboards and worktops
- furnishings and fittings including carpets.
How do capital allowances currently work for FHLs?
Currently, capital allowances are written-off for tax against an owner’s FHL income, like an expense of the business. Capital allowances can also be used against the income tax of individuals or partnerships (including marital partners) or the corporation tax liability of companies.
In essence, claiming capital allowances means a profitable owner will pay less tax. Or, if the tax write-off from the capital allowances is greater than the owner’s FHL income, the allowances can turn a tax profit into a tax loss, or they can increase an existing tax loss (and that tax loss can be carried forward and used to eliminate or reduce the owner’s tax bill in a future year or years).
April 2025: abolition of FHLs special tax treatment and introduction of the replacement of domestic items relief
From 6 April 2025, the Government has clarified that the special tax treatment for FHLs will be abolished. After repeal, properties being used to provide holiday accommodation will instead be treated for tax as ordinary residential lettings. One of the key changes is that owners will no longer be able to claim capital allowances. Instead, capital allowances will be replaced by a much less generous relief titled ‘replacement of domestic items relief’.
The major catch with the replacement by domestic items relief is that owners of former FHL accommodation will only be able to claim for the cost of comparatively inexpensive loose furniture and equipment. This is a stark contrast to the FHLs tax treatment which currently also includes plant and machinery allowances for the cost of typically more expensive fixtures including: electrical power and lighting, hot and cold water, heating, sanitary appliances and kitchen fittings. So, it is clear that the changes from April 2025 will increase the tax bills for owners of FHL properties.
FHL owners to act now and claim before April to ‘bank’ tax relief
The good news is that if any capital allowances are claimed by 5 April 2025, these will be safely ‘banked’ for tax purposes, and any allowances which have not been written-off for tax against profits by 6 April 2025 can be written-off subsequently for tax against the owner’s non-FHL residential property business. Similarly, any tax losses created by the capital allowances claim can be written-off for tax against future non-FHL residential property letting income. After 6 April 2025, no new capital allowances claims for spend on plant or machinery fixtures can be submitted to HMRC. So, it is essential that FHL accommodation owners act now to maximise their tax savings.