Staycation, staycation, taxation

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Gateley Capitus

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With the rise in the phenomenon of the staycation over the last two years, more and more people are renting out their second homes and many more are cashing in on the trend by buying investment properties to generate additional income.

Some of the rental prices reportedly charged to a lockdown-weary British public have been truly eye-watering. But around about this time of year when the taxman comes knocking on the door, the tax payable on the profits from letting the property can be pretty sobering.

Fortunately, HMRC gives tax relief for expenditure incurred on certain items of fixtures, fittings and equipment within qualifying properties. Unfortunately, however, many investors either don’t realise that such tax relief exists, or if they do know, don’t know how to identify and claim the costs that qualify.

Who qualifies?

If you are carrying on the trade of a Furnished Holiday Letting (FHL) business, you may be able to qualify for the relief. 

To qualify as a FHL your property must be:

  • in the UK or in the European Economic Area (EEA) 
  • 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 (you must intend to make a profit). If you let the property out of season to cover costs but did not make a profit, the letting will still be treated as commercial.

The property must also pass the following three occupancy conditions in any given tax year

1. 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 a FHL for that year.

2. 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’re staying in the property. HM Revenue and Customs (HMRC) do not consider the property to be available for letting while you’re staying there.

3. The letting condition

You must let the property commercially as furnished holiday accommodation to the public for at least 105 days in the year (70 days for the tax year 2011 to 2012 and earlier).

If the property in your FHL business meets these occupancy criteria, then tax relief for expenditure incurred on items of plant and machinery for fixtures and equipment within the property may be available.

What expenditure qualifies?

If you buy a residential house with a view to possibly refurbishing it and operating it as a FHL, a proportion of the expenditure incurred is likely to qualify for tax relief. Typical items would include the following:

  • Kitchens
  • Bathrooms
  • Boilers and central heating systems
  • Baths, showers and toilets
  • Lighting and power installations
  • Carpets
  • Curtains
  • Fire alarms
  • CCTV systems
  • Televisions
  • Beds, sofas and other furniture
  • Loose items of equipment such as dinnerware, glassware and cutlery
  • Etc.

The above items relate to expenditure incurred refurbishing the property after purchase. However, one element that is often overlooked is the plant and machinery fixtures that were in the property when acquired and which continue to be used afterwards. For example, if you buy the property with a perfectly good heating system and that continues to be used, the cost of that heating system, valued as a proportion of the purchase price paid, may also qualify for tax relief.

Value of the tax relief

If you spend £50,000 on a typical refurbishment that mainly includes the items listed above, the majority of the expenditure will probably qualify for tax relief.

And if you buy a property costing £500,000 that is in good order, up to £150,000 of the purchase price may qualify for tax relief.

That means that if you pay tax at the rate of 40%, the total value of £200,000 of allowable expenditure equates to total tax relief of £80,000 over time.

Accelerating the availability of the relief 

Ordinarily, the tax relief is available to investors over time with approximately 75% being claimed within 5 years. However, two developments over the last year could mean that the tax relief is accelerated and claimed over a much shorter period, potentially within a single year.

The Annual Investment Allowance (AIA) has been £1m since 1 January 2019 but was due to revert to £200,000 on 31 December 2021. However, in the Autumn Budget the £1m AIA was extended until 31 March 2023. 

That means that any expenditure incurred on plant and machinery up to the value of £1m can be claimed in the year incurred thereby potentially wiping out the entire tax payable on your FHL business income for that year. Any allowances not required in the year, simply stays in a pool for use in subsequent years.

The other measure that should be mentioned is the capital allowances “Super-deduction”. This was a very generous allowance introduced in the Spring Budget on 3 March 2021 for expenditure incurred after 1 April 2021 and before 1 April 2023. For every £100 spent on a qualifying item of plant or machinery, you will be allowed to offset £130 against your taxable income. So, for example, a kitchen costing £10,000 will generate a tax allowance of £13,000. However, for your FHL business to avail of the super-deduction it must be trading as a company paying corporation tax – it is not available to private individuals, sole traders or partnerships.

Next steps

Your accountant may be able to identify some of the items that you might have invoices for on a refurbishment, but most will find it more difficult to identify what is available in respect of general building work or extracting what is available as a proportion of the property acquisition cost. Only capital allowances specialists with expertise in both tax and property can truly maximise what you are entitled to claim. 

So, if you have a FHL business and think you may be entitled to claim capital allowances for expenditure incurred buying or fitting out the property, contact us for a free estimate of the tax relief that might be available.

Got a question? Get in touch.