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:
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).
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.
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.
Understanding Embedded Fixtures
Embedded fixtures are integral components or assets permanently attached to a property. Enhancing its functionality and comfort. These fixtures are not easily removable, like loose furniture. Examples of embedded fixtures in an FHL property include:
Heating and Cooling Systems
Central heating units, air-conditioning systems, and radiators.
Kitchen and Bathroom Fixtures
Built-in cabinets, countertops, sinks, bathtubs, and showers.
Wardrobes, shelves, and cabinets that are fixed on the property.
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.
Different types of capital allowances
Annual Investment Allowance (AIA)
One of the most valuable capital allowances for FHL owners is the Annual Investment Allowance (AIA). As of the current tax year, the AIA limit is £1 million. This means that you can claim a 100% tax deduction on qualifying expenditures, up to £1 million, for the year.
If the total cost of your embedded fixtures falls below the AIA limit, you can deduct the entire amount from your taxable profits in the year the expense was incurred. This immediate tax relief can help reduce your overall tax liability and boost your cash flow.
Writing Down Allowance (WDA)
If the cost of your embedded fixtures exceeds the AIA limit, you can still claim tax relief through the Writing Down Allowance (WDA). The WDA allows you to claim a tax deduction on the remaining balance of qualifying expenditures at a rate of 18% per year for general pool and 6% for special rate pool.
Tax Relief in Action
Let’s consider an example to illustrate how the AIA and WDA work:
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.
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.
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Our expert team are here to help answer any of your capital allowances questions or enquires you have about your commercial property.