With the repeal of the FHL tax regime, capital allowances will no longer apply to expenses for fixtures, furniture, or furnishings in holiday lets. This removal of allowances affects property owners’ ability to offset the cost of these assets against taxable income, changing the landscape of property tax planning. Here’s what you need to know:
1. Replacement of Domestic Items Relief: In place of capital allowances, property owners will be eligible for the Replacement of Domestic Items Relief. This relief allows landlords to deduct the cost of replacing certain items—such as furniture, furnishings, and appliances—from rental income, although it lacks the broader scope that capital allowances previously offered.
2. Pooled Expenditure Write-Down Allowances: Any qualifying capital expenditure that has been included in a capital allowance pool by 5 April 2025 can continue to receive Writing Down Allowances. This allowance enables property owners to gradually reduce the value of pooled expenditure over time. Balancing allowances and charges will also remain applicable to this pooled expenditure, meaning owners can continue to claim these until the pool is exhausted or a small pool claim is made.
3. Future Purchases and Section 198 CAA 2001 Elections: For future transactions, the repeal affects how capital allowances apply to property sales involving fixtures. Specifically, Section 198 of the Capital Allowances Act (CAA) 2001 allows the seller and purchaser of a property to agree upon a fixed amount of the purchase price that will be treated as the purchaser’s expenditure on fixtures within the property. However, this election’s usefulness is now limited for properties designated as dwelling-houses—such as holiday lets—when the purchaser is conducting a property business.
4. Limitations of Section 35 CAA 2001: Section 35 of the CAA 2001 restricts the ability to claim allowances on fixtures within a dwelling-house (which includes holiday lets used for holiday rentals). Under this rule, even if a Section 198 election is made, the expenditure on fixtures within a holiday property cannot qualify for capital allowances. This restriction means that purchasers cannot claim the Annual Investment Allowance (AIA) or other capital allowances on these fixtures, impacting the appeal of investment in such properties for potential buyers.
What Actions Should Property Owners Consider?
Review and Optimise Existing Capital Allowance Pools: For any current FHL properties, ensure that all qualifying capital expenditure is correctly recorded in a capital allowance pool by 5 April 2025. This step will enable you to continue claiming Writing Down Allowances on that expenditure beyond the repeal.
Re-Evaluate Future Investment Strategies: With capital allowances no longer applicable to holiday lets, owners may wish to re-evaluate property investment strategies. The tax efficiencies previously afforded to holiday properties will now be significantly reduced, affecting potential returns. Engaging a tax advisor to consider other structures or alternative property investments may help mitigate the impact.
Understand Relief Options for Replacement Costs: While the Replacement of Domestic Items Relief does not provide the same breadth of benefits as capital allowances, it remains available for landlords to claim on the cost of replacing items within a let property. Property owners should become familiar with the qualifying criteria of this relief to ensure they take full advantage of allowable deductions.
Another positive from the regime ending is the use of losses from FHLs. Any losses from the FHL carried forward from April 2025 will be treated as losses of the ongoing UK or Overseas property business. These losses can therefore be offset against other property income for individuals, or against other income for companies in the following year.
The abolition of the FHL tax regime has far-reaching implications, especially for capital allowances on furnished holiday lets. Although options like the Replacement of Domestic Items Relief and Writing Down Allowances on pre-2025 pooled expenditures offer some relief, the restrictions on claiming allowances for property purchases via Section 198 and Section 35 CAA 2001 are substantial. This policy shift underscores the need for strategic tax planning and expert guidance in property tax matters.
At HMA Tax, we specialise in helping property owners adapt to changing tax landscapes. For tailored advice on navigating these new rules, please reach out to our team. We’re here to support you in optimising your tax position and maximising the efficiency of your property investments.
