Legislation has been published for the abolition of capital allowances on commercially let furnished holiday accommodation (FHL). Anyone owning an FHL in the UK or EEA who has not claimed capital allowances may be able to claim considerable tax benefits if they act now.
The legislation will be introduced in the next Finance Bill and will take effect from 1 April 2025 (corporation tax) and 6 April 2025 (income tax).
THE BAD NEWS
The changes mean that from April 2025, any income and gains generated from FHLs will form part of a person’s UK or overseas property business and so will not qualify for capital allowances (the property will be deemed to be a residential dwelling). While this is bad news in terms of capital allowances, it does lead to a significant benefit with the ability to carry forward loss relief against other property business income.
The changes apply to taxpayers who pay either income tax or corporation tax.
In addition, income tax paying owners of FHLs could previously offset all their interest against their profits. The new measures now restrict this to 20% (basic rate for Income Tax).
THE GOOD NEWS
Impact on Tax Payers Who Have Claimed Capital Allowances on FHLs Prior to April 2025
For taxpayers who have already pooled (or will pool) allowances in their tax return for expenditure incurred up to April 2025, the good news is that they can continue claiming capital allowances, until such time as the property is sold or is no longer generating income.
Under current rules a loss generated from a FHL property business can only be carried forward and utilised against future profits of that same FHL business. Post April 2025, the FHL trade will no longer exist so any losses in a FHL business before April 2025 are carried forward and will qualify for loss relief against other property income of all the properties in that business. This wider tax relief will be very valuable.
For individuals who have losses to carry forward from their FHL business after April 2025, losses generated from the FHL business can be carried forwards and offset against future years’ profit in the UK or overseas business.
While the capital allowances have been removed for new expenditure, going forwards new post April 2025 expenditure will qualify for replacement of domestic items relief.
Opportunities
Currently many FHL owners haven’t bothered claiming capital allowances as they had tax losses and these tax losses were ring fenced against the FHL trade.
The good news is they are no longer ring fenced and historic and current FHL losses (including capital allowances losses) can be offset against any other property income in the same ownership. It is important to revisit old purchases and refurbishments. This is even more imperative because bank interest will be restricted to just the 20% basic rate. These unclaimed allowances without any time restriction will need to be claimed in tax periods before April 2025. For individuals it will be important to claim in their 5 April 2025 tax return. For companies it will be in their year ends prior to April 2025.
One other change that seems possible is the removal of the requirement to meet letting and occupancy conditions. Currently, amongst a number of other conditions, there is a requirement for the FHL property not to be rented to the same person for more than 31 days; otherwise capital allowances are denied. With the withdrawal of FHL capital allowances, it appears that the holiday property could potentially be rented to the same person for longer with potentially no impact on the losses carried forwards.
Example
Mr & Mrs Windsor bought a FHL in 2018 for £500,000. They did not claim capital allowances. They can now claims capital allowances in their 6 April 2024 tax return of circa £200,000 and after April 2025 can offset these allowances against their rental profits of both their FHL and their other rental properties.
Lovell Consulting Commentary
While the abolition of claiming capital allowances on FHLs for new additions expenditure post April 2025 is disappointing, there is still time to pool allowances in relation to any current or historical expenditure incurred up to 1/5 April 2025.
It is therefore more important than ever to take advice now and review any current or historical expenditure incurred on your FHL. Please get in touch with us if you would like a free high level review of what tax savings you could achieve.
