Maximising Tax Relief for an FHL with Embedded Fixtures

What is a Furnished Holiday Let (FHL)?

A Furnished Holiday Let is a special category of rental accommodation that offers certain tax advantages compared to standard residential rentals

To qualify as an FHL you must meet three essential occupancy criteria set by HMRC:

Availability

Your FHL property should be available for commercial holiday lettings for at least 210 days in a tax year (excluding any days that you stay in the property yourself).

Actual Letting

It must be rented out to guests for at least 105 days during the same tax year. Any days are excluded if friends or relatives stay on the property.

Short-Term Occupancy

The property should ideally not be occupied by the same tenant for more than 31 consecutive days. If lettings that exceed 31 continuous days are more than 155 days during the year, this condition is not met. There is an exception to this rule if there are unforeseen circumstances where a holidaymaker is unable to leave on time due to illness or a delayed flight, etc.

For a continuing let the criteria above should be applied in the tax year, for a new let the tests should be applied to the first 12 months from when the letting began, and if your letting stops the tests are applied to the last 12 months of letting.

There is also an “Averaging Rule” that may need to be applied in certain circumstances.

An Opportunity with Capital Allowances

For regular residential rental properties, the cost of repairing or replacing fixtures may be claimed as a revenue expense. Which reduces the taxable rental income. However, owning an FHL opens up an exciting avenue for tax relief through capital allowances.

Capital allowances are a form of tax relief that allows you to deduct the cost of certain assets. This includes embedded fixtures, from your taxable profits. This deduction can lead to significant tax savings and enhance your overall return on investment.

Tax Relief in Action

Let’s consider an example to illustrate how the AIA and WDA work:

Example 1

Suppose you spent £1.2 million on qualifying embedded fixtures for your FHL property.

You can claim the full £1 million as an immediate tax deduction through the AIA in the first year.

For the remaining £200,000, you would most likely be able to claim a Writing Down Allowance of 18% per year until the balance is fully deducted.

Please note, for simplicity, we have not included super-deduction or Full Expensing (FE) in this example. However, both should be considered when reviewing recent expenditures.

Remember to… keep detailed records of all embedded fixtures. With careful planning and proper documentation, your FHL business can thrive while remaining tax-efficient and compliant with UK tax regulations.