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Maximising capital allowances on holiday lets

20/04/2017

If you let out a property as a holiday home and meet the right conditions, you can claim capital allowances as a deduction against the rent you receive. But where do you stand if you meet the conditions only some of the time?

Letting conditions

If you’re lucky enough to own a holiday home which you rent out, you can take advantage of special tax treatment. To qualify as a furnished holiday let (FHL) the property must only be let for short periods at a time, no more than 31 days. Plus, it must also be available for and actually rented out to holiday makers for a minimum period each tax year .

Capital allowances

One advantage to meeting the FHL conditions is that the tax rules treat the rental business as a trade. This means you can claim capital allowances (CAs), HMRC’s equivalent to a deduction for depreciation, as an expense against rental income. CAs can’t usually be claimed against income derived from letting a residential property. However, there are one or two quirks to how CAs for FHLs are worked out.

Non-qualifying years

If in any year your property doesn’t meet the letting conditions mentioned above, CAs can’t be claimed. In fact, the rules say you should recalculate the CAs for the last year where the property counted as an FHL as if all the equipment used in the business were sold for the price you could expect to get on the open market. If in a later year the property again qualifies as an FHL, CAs can only be claimed on the depreciated value of the equipment.

Example. Bill owns a property that qualifies as an FHL for 2013/14, but not for 2014/15 and 2015/16. On the last day of 2013/14 the equipment’s sale value is £5,000. The property qualifies as an FHL again for 2016/17. The value of the equipment at the start of that year was £3,000. Bill can only claim CAs on that amount. This means he loses CAs on the £2,000 that the equipment depreciated by during the two years the property didn’t meet the FHL conditions. However, Bill can use a little-known HMRC concession to increase the CAs he can claim.

Tip. Instead of calculating CAs for 2013/14 as if he had sold the equipment, Bill can instead choose to ignore the two-year gap during which his property wasn’t an FHL. This means he can pick up his claim for CAs in 2016/17 where he left off. This means he won’t lose CAs on the £2,000.

Personal use

The rules also say that if you use the property personally or make it available rent free to others, you must reduce your CAs claim proportionately. For example, if you use the property for a month, your CAs claim must be reduced by a twelfth.

Tip. Don’t make the mistake that many FHL owners do and reduce your CAs claim by comparing the time you use it personally to that when it’s let out as holiday accommodation. HMRC accepts that a vacant period counts as business use for the purpose of calculating CAs.

Example. Bill lets out his FHL for 26 weeks during 2014/15 and uses the property himself for three weeks. He can claim 49/52 of the CAs available for the year.

In Summary: Capital allowances should be worked out as if the equipment had been sold, but by concession HMRC allows you to leapfrog years where the property doesn’t meet the conditions. If in a later year the conditions are met, you can pick up your CAs calculation where you left off. This means you don’t lose any tax relief.