Capital allowances is a tax relief that allows businesses to offset the cost of certain expenditure against its taxable profits. It has been eroded by previous governments offering little scope for residential investors.
But the boom in domestic holidays in 2020 predicted to continue into 2021 has seen a renewed interest in furnished holiday lets. Property investors, and sometimes their advisers, often wrongly assume capital allowances are not available in respect of such properties due to them often being managed much like normal residential dwellings.
The capital allowances regime has the potential to offer investors in holiday lets considerable tax savings but certain criteria must be met to qualify.
Firstly, a property must qualify as a furnished holiday let. This means that it must be furnished for occupation, and meet the following three qualifying tests during a 12-month period or a tax year:
- The availability condition (availability test/threshold) – during the tax year the accommodation was available for commercial letting as holiday accommodation to the public for at least 210 days.
- The letting condition (occupancy test/threshold) – during the tax year the accommodation was commercially let as holiday accommodation to the public for at least 105 days.
- The pattern of occupation condition – the accommodation was not let for periods of longer-term occupation for more than 155 days during the year. Longer term occupation is letting that exceeds 31 days.