Furnished Holiday Let capital allowance trap!

Furnished Holiday Lets (FHLs) are a type of property income that attracts special tax treatment, giving similar tax breaks to a trading activity rather than an investment activity. A broad overview of the rules can be found in HMRC’s Helpsheet 253.

The ability to claim capital allowances within an FHL is one of the key advantages over a non-FHL property; however, there is a bear trap to watch out for that is often missed.

When a property first falls within the FHL rules, either by conversion of an existing rental property or by acquisition, it is tempting to maximise any capital allowance claim. There are specialist firms out there that will conduct a formal survey for you and identify significant claims.

Further, in certain circumstances, if you meet the conditions for an Annual Investment Allowance claim, this could not only wipe out the first year’s profits but generate a loss that results in a number of years profits being reduced to Nil.

Clients are attracted to this proposition due to the obvious cash flow benefits, but recently we were asked a question by a caller who had made a significant claim, but 8 years down the line, the owner decided to change the use of the property and use it personally.

In these circumstances, you must value all the assets that you have claimed capital allowances on and notionally dispose of them to yourself; this can potentially lead to a large capital allowance balancing charge.

In our caller’s case, a specialist firm identified in excess of £30,000 of capital allowable items, including the boiler, radiators, sinks, furniture, etc. Eight years later, some of these items had been replaced or repaired, but substantially, they were worth a similar amount to the original claim. To make matters worse, this balancing charge resulted in a higher rate of tax liability, whereas the initial claim only saved tax at the basic rate.

Overall, the client was worse off for having made the claim, despite the cash flow advantages.

When advising FHL owners regarding the potential claim for capital allowances, consideration of the longer term and the potential for balancing charges should always be considered.

If you need any assistance in this or any other matter, please get in touch.

Jim Calverley ATT
Tax Consultant

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