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Capital allowances if change from L&P to FHL

Capital allowances if property changes from L&P rental to FHL

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Client set up a holiday let in July 2018.

In the first 12 months the property did not meet the criteria for FHL. Although the property was available to let for the whole of the first year and advertised widely only 60 nights were actually let. They are however likely to meet the FHL criteria in the second year.

My understanding is that although they tried to meet the FHL criteria in the first year they did not succeed in meeting the criteria therefore they cannot treat the business as a FHL. It must be taxed as L&P income so none of the costs of setting the property up, furnishing, plant and equipment etc will be allowable. Just running revenue expenses.

However if the business meets the criteria to be a FHL in the second year can all these set up costs then be brought into the FHL business and capital allowances claimed? 

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By mdoodney
16th Dec 2019 11:16

Both ordinary UK property businesses and UK furnished holiday lettings are qualifying activities for CA purposes (CAA01/s15(1)(a) & (b) respectively) and a property business is the former unless it is the latter (S16 & S17). Assuming the property here is in the UK, presumably the restriction on claim is the exclusion of a 'dwelling house' used in an ordinary property business from qualifying for CAs (s35). Provided the assets are still owned and used in the FHL business at the end of the accounts year, s12 should permit a claim in respect of pre-trading expenditure, generally there is no restriction on when CA QE can be claimed.

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By The Dullard
16th Dec 2019 11:51

Not s 12. S 13 applies in this situation.

That is a qualifying activity of "standard" property rental commences and finishes in year 1. The expenditure was as much for that qualifying activity as it is for the next qualifying activity (given that they are in, in reality, the same thing.

In year 2 you've got a new qualifying activity of FHL property rental and the assets are introduced at their market value, which might not be all that dissimilar to cost.

However, I'd go back and recheck the FHL qualifying criteria with the legislation, and consider how it applies when letting begins (ie first 12 months rather than first tax year) and the possibility of an averaging election.

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Replying to The Dullard:
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By mdoodney
16th Dec 2019 12:14

Agreed, s13B applies here

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By plummy1
12th Feb 2020 12:15

Don't forget you can also claim capital allowances on the fixtures / integral features in the property once it qualifies as an FHL. This can make a substantial difference to their tax liability if they are going to generate profits.

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