In this episode, Mark Stallard is joined by Jason Batty, Director at Eureka Capital Allowances to discuss how to claim capital allowances on holiday lets.
What are capital allowances and why are they important?
Capital allowances. cover expenditure that your business can claim against taxable profit It’s a claim on assets that are considered essential to the running of your business.
There are tremendous opportunities out there for self-catering owners to capitalise on. It’s a way of unlocking hidden tax relief in furnished holiday lets. It’s an area that is widely overlooked or misunderstood.
We find that 80% to 90% of furnished holiday lets haven’t made claims or taken advantage of all the tax relief that they’re entitled to.
Is this something an accountant can help with?
This is a very specialist area. There are two opportunities when it comes to capital allowances, one is something that your accountant can claim on, but the other one needs surveyors. The claim is all about embedded fixtures within properties.
These are things like the heating system, electric system, the ventilation system, flooring and much more. These are clearly essential to the running of a business – you’d get tremendously bad TripAdvisor reviews if you didn’t have those fixtures within your property.
When it comes to capital allowances, you can claim on items that were in the property when it was bought, even if that was a long time ago.
It is capital allowances ‘purchased claims’ that you need the surveyor for. This is where you have bought fixtures for the property since acquiring it.
So, opportunity number one is purchase claims on items that were in the property when you bought it. Number two is claiming on expenditure carried out since acquisition.
Your accountant will have the cost information for ‘opportunity two’. If you bought a piece of land and built the property from the ground up, you would have receipts for the heating system, electric system, labour costs etc. The accountant would have the cost information to claim capital allowances on those items.
But if you bought a property years ago these fixtures are already in the building. There’s no way that the accountant could put a value on those items because there’s no cost information. So that’s where the surveyors are essential.
Why hasn’t my accountant mentioned this?
HMRC has said that 80% of commercial buildings haven’t made a claim on the fixtures in their property. It’s a very specialised area and a lot of people haven’t heard of it. Because accountants can’t help, it’s down to capital allowances consultants to help you claim. And there’s probably only a few dozen firms in the UK that provide this service.
Historically this has been quite an expensive area, and some of our competitors would only look at properties over perhaps £2 million. But in fact, property worth £100,000 upwards can make a claim on capital allowances.
Because it’s not something that accountants can do, many of them aren’t aware of it. We do, however, get a lot of referrals from accountants.
Who qualifies for capital allowances, and how much might I be able to claim?
Firstly, you must own the property and have paid over £100,000 for it. To qualify as a furnished holiday let, the property must not be let to the same person for more than 31 consecutive days and it must be available to let for 210 days of the year.
As a rule of thumb, if the property was purchased for £400,000, the surveyors would typically identify around 25% of the purchase price as the qualifying fixtures: the heating system, electrics etc: the things that were in the building when it was purchased. So that’s about £100,000 in unclaimed allowances.
That would give a basic rate taxpayer around about £20,000 in future tax savings, which would also include a cash rebate. A higher rate taxpayers would gain £40,000 in future tax savings, including a cash rebate.
The cash rebate is dependent on how much tax you would have paid on the previous tax bill. That typically covers our fee. So there’s nothing for the client to pay from their own pocket.
What’s the process to make a capital allowances claim?
Our job is to streamline the process to make it as simple as possible. It starts with an initial call with myself or a member of the team to scope out the claim and whether it qualifies.
Next we provide a bespoke proposal to outline the entitlement, the cost and all the details. If you’re happy with that, we need to see your most recent tax return, which we can obtain from your accountant. Then it’s a question of a surveyor taking a look around the property.
Once we’ve got the survey notes back and tax returns, we can see how much we can claim back and build the report from there. We go over this with the client before it’s submitted to HMRC. The whole process is around about eight to 12 weeks from getting us involved until the money’s in the bank.
How much will it cost me?
We charge a percentage of the unclaimed capital allowances. The cost depends on the size of the building, but it’s usually 3-4% of the allowances identified. There’s no upfront costs for the service whatsoever, not even the survey. Where most companies will charge for that, we look at the tax returns first to work out what the cash repayment will be and decide if it’s worth pursuing.
Is this going to make HMRC want to explore all my tax details?
Between us, we make thousands of claims and we’ve never invited an enquiry from HMRC as a result. At the end of the day, this is tax legislation and it is your right to make the claim from HMRC.
If in the unlikely event there was an enquiry, we would deal with it. But it is unlikely. This is written in UK tax law and it’s an entitlement that most people aren’t aware of.
What if I haven’t paid any tax on my holiday rental?
You need to be paying tax on your rental income. Even if you haven’t paid tax on the income, you can still bank the allowances. You just won’t get a cash rebate. You can still get the allowances to use going forward to reduce your tax liability for years to come.
Plenty of clients are willing to make the claim, pay a fee and just bank those allowances for future years.
How does it work if my property was residential until I turned it into a holiday let?
It’s very common for a furnished holiday let to have been formerly residential. It actually makes it a more straightforward claim. If you lived in the property prior to letting it, however, you wouldn’t be eligible to make a claim until it became a place of trade.
What if I have just sold my property, can I claim retrospectively?
There is a two year window from ‘disposal’ – selling the holiday let – to making the claim. Otherwise, the entitlement is gone forever from that property.
Does making a claim affect my capital gains tax when I sell?
Claiming capital allowances will not usually affect the base cost for capital gains purposes. The only occasion where it would affect it, is if you have a furnished holiday let, decide to cease trading and make it your primary residence. You would then have to repay the claim.
There are significant opportunities out there for furnished holiday lets to unlock hidden tax relief in their property. It’s not a service that accountants can provide.
Capital Allowances are a very specialist area of taxation where we can claim on embedded fixtures that were in your property when you purchased it.
We would be happy to explore this for you and talk to your accountant to see if we can unlock hidden tax relief. The average figure that we get back for furnished holiday lets is around about £33,000 in future tax savings.
We can ascertain quickly whether you qualify or not and give you a figure for what we believe you’re entitled to.
If you’re interested to learn more, please contact the Eureka Capital Allowances team. Let them know that you discovered them with HHH Mortgages and they’ll be sure to look after you!
THE ANSWERS PROVIDED ARE JASON’S OWN AND WE ALWAYS RECOMMEND SEEKING PERSONAL ADVICE.