Capital allowances and the furnished holiday letting
By John Endacott, Francis Clark LLP
There has been a lot of publicity of late about claiming capital allowances in respect of furnished holiday lettings. In part this has been prompted by the withdrawal of the loss relief option against other income from 6 April 2011. Given that accounts and tax returns for the tax year 2010/11 are still being prepared then it is possible to include capital allowances claims in those computations which can maximise the loss for relief against other income. Therefore there is a “last opportunity” momentum about the whole thing.
Currently it is possible to get a large amount of immediate tax relief on a capital allowances claim as a result of the annual investment allowance and the rates of writing down allowance. This means that a claim is particularly attractive at the moment, especially if the owner has a large amount of income from other sources.
For furnished holiday lettings then capital allowances can be claimed on the fixtures and fittings in the property such as beds, sofas, TVs etc. These are normally claimed without too much problem and so most owners will have claimed these in the past. However something that is not always appreciated is the ability to claim capital allowances on so called “integral features”. This arises from the capital allowances rules which apply to trading businesses more generally. Integral features relate to the plant and machinery that is integral in a building and so covers electrics, plumbing, heating etc. In broad terms this relates to items that are more than just screwed to the floor or the wall but which instead are built into the fabric of the building.
As a rule of thumb, such integral features can amount to between 10% and 30% of the cost of a building when purchased. Where the figure comes out in that range will depend upon the nature of the property and the higher the specification of the building then the higher the percentage of integral features that one would expect. The bigger percentages are most likely to be encountered in very high specification overseas properties which have both air conditioning and swimming pools. A more likely figure for a UK property is 10% to 20% with a claim at the bottom end of that range being relatively unaggressive.
There are a number of specialist firms of surveyors who are able to assist with such capital allowances claims and undertake all the appropriate work to establish the correct percentage to claim. There have been some new entrants into the market recently and so anyone that is interested in appointing a specialist to advise on this area should carefully consider the most appropriate firm to appoint. Their normal tax advisors should be able to make an appropriate recommendation.
There are some pitfalls to watch out for in respect of making such a capital allowances claim. In particular what happens if the furnished holiday letting is sold at a later date or is changed to being let on a long term basis. The starting point is that on a disposal of a furnished holiday letting then the sale proceeds need to be brought into the capital allowances computation and a balancing charge or allowance will arise. If a large loss claim in respect of integral features has been made in the past then it is likely that there will be a large balancing charge at the time of sale. So whilst a large income tax repayment could be obtained now, on disposal of the property the concern is that the benefit of that income tax repayment would be clawed back and so a large tax liability would arise at that point. For this reason many clients have been reluctant to make such capital allowances claims.
In order to try and avoid this scenario on sale it is possible to make an election to fix the sale proceeds such that the seller retains the benefit of the capital allowances claim. However care is required because the government is currently consulting on changing the rules such that it may not be possible to make that election in future. Certainly some change is likely. There is also an ongoing consultation which is likely to lead to a restriction on the ability to make historic capital allowance claims as well. However, a further pitfall to watch out for is that the tax rules have been changed to ensure that where a property goes from being let as a furnished holiday letting to being let on a long term basis then there is a claw back of capital allowances at that point based on the market value of the relevant plant and machinery. So if a large capital allowances claim is made in respect of integral features and the property is subsequently moved to being on a long term let then there will be a claw back of the capital allowances claimed as it is unlikely that the integral features will have fallen in value.
There are tax planning opportunities but care is required and it is important to get good specialist advice before any action is taken.