Clawback of capital allowances on Furnished Holiday Let

Clawback of capital allowances on Furnished...

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I purchased a house off plan in Cyprus in 2007 for £320,000.

I let the house out for between 10 and 16 weeks a year but it is available to let for the whole year.

Via my accountant at the time I made capital allowance claims which created losses on the FHL which I was able to offset against other income.

I claimed a large one off claim of around 25,000 for capital allowances in 2009 (via the AIA) and around 500 per annum writing down allowances per annum since then.

Since the qualifying rules for FHL were changed to 105 days pa in 2012 it has become more difficult to achieve FHL status and in 13/14 I had to make a "period of grace" election because I only got around 80 days of lets. I think I will need to do the same in 14/15.

I am concerned that I may have to pay back the tax relief I have received if I fail to achieve 105 days pa going forward.

Can anyone advise how this will work in practice and how the tax might be calculated if I continue to fail to get to 105 days per annum.

The house is now worth only £190,000 (if we are lucky) and obviously the new capital items I claimed allowances on 6 years ago are now suffering from considerable wear and tear.

What is the worst that could happen and how would you work out how much tax might have to be repaid?

Could I be hit with a one off large tax charge if I continue to fail to achieve 105 days?

Lets say the capital items we claimed capital allowances were now worth say 40% of what they were worth when new? Not sure how you would set about valuing things like air conditioning systems, fitted kitchens other intergal features and a swimming pool that were installed 8 years ago!!  I was a 40% tax payer in 2008 but only a 20% taxpayer now.

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By User deleted
23rd Aug 2015 14:32

Best discuss with your accountant who will have the full details of your personal circumstances and the specifics of your FHL business.

 

Alternatively, the online HMRC manuals can be quite useful although they obviously represent the views of HMRC which may be open to challenge.  Put a few phrases into Google and see what comes up.

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By Steve Kesby
24th Aug 2015 12:42

Yes there is an adjustment

Essentially, you had one qualifying activity, an EEA FHL, and when you can no longer satisfy the conditions or make any further elections, that qualifying activity will cease, and a different qualifying activity, a non-UK property business will commence (or the property will pass from the ceased EEA FHL business to a non-UK property business).

The cessation will occur at the beginning of the tax year following the one in which the property last qualifies (whether under election or otherwise) and there will be a balancing event at that point, and you will be deemed to have disposed of the plant and machinery at its market values at that point.

Essentially you have claimed CAs of around £30,000 and (assuming that was the amount spent was also £30,000 and the value now is £10,000) you will now have a taxable balancing charge (which will be taxable at 20%, ie £2,000).

This would always have been a risk, even under the old rules, where there was no period of grace election.

You would have achieved actual tax relief on the expenditure originally of around £10,000, so you have still gained substantially.

You might consider lowering prices to achieve higher occupancy, but that may cost you more than the tax.

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