Updated: Jul 5, 2020
With summer approaching we take a fresh look at one of the core reliefs for capital expenditure on purchasing or developing properties and related assets for a furnished holiday letting business – Plant and Machinery Allowances.
What is a furnished holiday letting business?
A furnished holiday letting (“FHL”) business is one that consists of the commercial letting of furnished holiday accommodation in the United Kingdom (England, Wales, Scotland and Northern Ireland but not the Isle of Man or the Channel Islands) or the European Economic Area (EEA). The EEA comprises the member states of the EU plus Iceland, Liechtenstein and Norway.
It must have furniture for ‘normal occupation’ and the tenants must be entitled to use it. The letting of the property should be carried out commercially with a view to profit and the following occupation requirements must be met:
Availability threshold – be available for 210 days (30 weeks)
Pattern of occupation condition – if occupied for more than 31 days by the same person/people, there must not be more than 155 days (total) of such longer lettings.
Letting condition – be let commercially as a holiday property for 105 days (15 weeks)
The period in question for (1) to (3) is usually the tax year in which the owner of the property is an individual or a 12-month accounting period if the owner is a company. The only exceptions to this will be the years in which the letting starts and ends.
It is common for the availability threshold and pattern of occupation requirements to be met but not the letting condition. This can occur if the weather over the summer is poor, in which case the owner may be able to make use of an averaging election or a period of grace election.
More information on FHL requirements can be found at HS253 Helpsheet.
What are Plant and Machinery Allowances (PMAs)
Individuals and companies that own and operate an FHL business will have rental income taxed under income or corporation tax rules respectively. An FHL business that incurs ‘capital expenditure’ on qualifying PMAs can reduce its FHL rental profits subject to either income or corporation tax.
If the new building expenditure doesn’t qualify as a repair and relates to general building works (i.e. not PMAs) it will not qualify for an income or corporate tax deduction.
With the temporary increase in Annual Investment Allowances, FHL businesses may be eligible to deduct up to £1 million of new expenditure in the current tax year (i.e. an income tax saving of up to £460,000 and corporation tax saving of £190,000).
FHL losses can be carried forward and offset only against future profits from the same rental business. For this purpose, a taxpayer’s UK FHLs are treated as one business and their EEA FHLs as another; losses from one cannot be offset against profits on the other. Nor can the losses be set against other non-FHL rental income.
One advantage PMAs have over repairs, particularly for hereditable additions, is that if the FHL property is sold for a gain the qualifying capital expenditure is not excluded from the capital gains tax calculation. When combined with a favourable capital allowances election (e.g. £2) the fixtures PMA claim can then provide an absolute and additional tax saving.
If the FHL business on which a PMA claim is based ceases, a disposal value may be required to be brought into account. Depending on the circumstances, the business may suffer a clawback or balancing allowance in the chargeable period involved.
What are Qualifying PMAs?
Qualifying PMAs can include all loose furniture & equipment (e.g. tables, wardrobes, beds, cabinets, drawers, curtains, blinds, garden furniture, white good etc) you would normally expect to see in an FHL.
However, it may also include things like heating, lighting, air-conditioning, lifts, hot/cold water, telecoms, fire/security alarms, solar panels, brise soleil, bathroom/bedroom fittings/furniture, kitchen worktops/shelves/cupboards, above ground foul drainage, carpets, access control systems, hot tubs/jacuzzi, swimming pool installations etc.
One of the main challenges in PMA claims is not determining what qualifies but optimising the actual real costs (which may include design fees, contractor prelims and other incidental installation costs).
Construction contracts are not designed for tax or accounts purposes. Tender quotations do not generally segregate components into qualifying or non-qualifying parts. Fixed lump sum quotations and/or information gaps are not uncommon (e.g. joinery quotations which cover the installation of both non-qualifying elements such as permanent walls and a new kitchen installation).
Another challenge is if you buy your FHL property from a developer. The tax rules require a ‘just and reasonable’ apportionment of the purchase price to isolate qualifying PMAs and non-qualifying land and building which can differ from the actual costs incurred. HMRC are entitled to reject claims that do not have a proper capital allowances valuation.
If you buy an existing property you will likely be restricted and will need to carry out a thorough due diligence before making any claim. If your FHL property forms part of another building (e.g. main residence) and you install PMA assets to serve both (e.g. centralised heating system) you will need to split the costs involved.
At Furasta Consulting we combine tax, surveying and construction expertise to help FHL business owners and their advisors make the most of PMAs and make claims in confidence.
If you would like further details, please do not hesitate to contact us.