There’s more than one rule which determines the type of tax relief you can claim for capital expenditure in a property rental business. Different rules can apply from year to year. Which can you claim and how can you ensure maximum relief?
Property rental businesses
Generally, it doesn’t matter what type of property you let, you’re entitled to a tax deduction for the costs of running your rental business. The exception to this rule is the cost of capital items such as equipment. These qualify for capital allowances (CAs). But if the property is residential you can’t claim CAs for equipment etc. used by the tenant unless the property qualifies as a furnished holiday let (FHL).
CAs or no CAs?
CAs are tax deductions allowed instead of depreciation shown as an expense in your rental business accounts. If you have an FHL you can claim them for equipment such as cookers, beds, TVs or other furnishings. The trouble is your property might qualify as an FHL one year but not the next.
Trap. If your property ceases to qualify as an FHL, you must work out the CAs for the last year that it did as if you had stopped letting it altogether. You must put a value on all the items which you’ve claimed or could claim CAs on and deduct that from the value for tax purposes, i.e. the cost of the item less the CAs you’ve claimed. The difference, if positive, is an extra tax allowance, and if negative is taxable as income.
Example. Jack lets a property that qualifies as an FHL for 2018/19, but not for 2019/20. It qualifies as an FHL again in 2020/21. At the end of 2018/19 the value of items on which Jack has claimed CAs is £6,000. The total cost of items for which CAs have been claimed was £18,000. Jack claimed for all of this which means that the value for tax purposes is zero (£18,000 cost less CAs claimed £18,000). Deducting the £6,000 from this produces a negative figure which is therefore taxable as income for 2018/19. When the property qualifies as an FHL again (2020/21) Jack can again claim CAs for any of the capital items that are still in the property. The trouble is if they have devalued he is only entitled to claim CAs for the devalued amount.
Non-FHL periods
In our example 2019/20 is a non-FHL qualifying year. Jack isn’t entitled to claim any tax deduction for the items that previously qualified for CAs. What’s more, if he purchases new items he can’t claim capital allowances for these either. However, he will be entitled to claim CAs for both old and new capital items when the property again qualifies as an FHL. The trouble is that all the items will have depreciated meaning that he won’t receive as much tax relief.
Tip. A special concession might allow Jack to treat the property as an FHL for 2019/20 despite it not meeting the qualifying conditions (see The next step ). This would prevent Jack from losing out on CAs. Jack must send a formal election to HMRC if he wants to take advantage of the concession.
If your property qualifies as a furnished holiday let you can claim capital allowances (CAs) for expenditure on furnishings and equipment, etc. The trouble is if the property ceases to qualify as an FHL, even for a year, you’ll lose the right to CAs. To prevent this you might be entitled to make an election to treat the property as an FHL throughout.