Capital allowances are relevant for virtually every business in the UK as well as for investors in commercial property. In the context of allowances there is an important distinction between commercial property and residential property.
Capital allowances are given for certain categories of capital expenditure, most commonly on plant and machinery. Allowances are not typically given for plant and machinery in a dwelling house. This restriction, however, does not apply to a furnished holiday letting business.
In other words, a furnished holiday letting business (FHL) is treated differently from a dwelling house for capital allowances purposes. In order to qualify as an FHL, various conditions must be satisfied relating to availability, letting and the pattern of occupation. Where these conditions are met, allowances will in principle be available, and the owner will also enjoy a variety of other tax advantages.By way of example, a private investor buys a property which qualifies as an FHL for £500,000. He claims capital allowances of £125,000 amounting to 25% of expenditure. In our experience claims for allowances in this sector tend to range between 10% and 25%. His overall tax saving will be £50,000, assuming a rate of tax of 40%. His allowances can only be used to reduce the tax liability on income from his FHL as opposed to being offset against any other income.
If you are buying an FHL you should fully understand whether or not the seller has claimed capital allowances before you exchange contracts. Ideally you should make your expectations clear from the outset in heads of terms, and it is essential to have a complete understanding before contracts are signed. Failure to do this may mean that the valuable tax relief is permanently and completely lost.
If you are buying, altering, extending or refurbishing an FHL you should consider whether or not you may claim capital allowances. We would be pleased to help. Please do not hesitate to contact us.