Changing from residential rental property to FHL

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Hi everyone

My client has recently changed her residential rental property to a Furnished Holiday Let part way through the tax year. She had the rental income for the first 8 months of the year and the property was empty while a major renovation was done on the property. In the last 4 months of last tax year, she spent around £40k on the renovation and £5k on the furniture and white goods. The property is now fully funcstioned as a FHL. 

I am doing her tax return for last year and I am not sure how I should treat all her expenditure on the renovation and furniture as they were incurred from the last 4 months of the tax year. 

I would really appreciate your advice .

Thanks

 

Replies (5)

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By David Ex
25th Oct 2022 11:24

bpham wrote:

she spent around £40k on the renovation … I am not sure how I should treat all her expenditure on the renovation ….

“Renovation” isn’t a tax concept so you need to analyse the £40,000 in detail to see what it was spent on.

Thanks (1)
Scooby
By gainsborough
25th Oct 2022 11:39

I assume the first 8 months of the year refer to rental income received from one single tenant, in which case the conditions for an FHL will not be met in 2021/22.

You therefore need to review whether the tests are met for the tax year 2022/23, in which case capital allowances on the white goods would be possible (18% WDA rather than AIA if bought in previous period) when the new qualifying activity of the FHL starts.

As David says, you need to analyse the renovation expenses to see what relates to capital, what relates to revenue and where capital allowances could potentially be claimed.

Thanks (1)
Replying to gainsborough:
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By bpham
25th Oct 2022 12:36

Hi
Yes I will analyse the renovation expenses like you and David suggest. But like you said, the property wont meet the conditions for an FHL in 2021/22 tax year. All the expenditure on renovation and white goods was incurred in 2021/22, should I just ignore them when doing their tax return this year and then assess them in their tax return next year 2022/23?
Should I just calculate their property income using the income and expenditure for the first 8 months for 21/22?

Thanks

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Replying to bpham:
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By David Ex
25th Oct 2022 12:52

bpham wrote:

should I just ignore them when doing their tax return this year and then assess them in their tax return next year 2022/23?

No, you need to follow the rules having established exactly what the expenditure is.

Thanks (1)
Replying to bpham:
Scooby
By gainsborough
25th Oct 2022 12:57

For the white goods and furniture, replacement of domestic items does not seem to apply for 2021/22, in the circumstances you describe, as condition B would not be met (no lessee in dwelling house in last 4 months of 2021/22).

For revenue expenditure, the letting business is still continuing, so allowable expenses incurred in 2021/22 should be set against 2021/22 rental income.

The capital expenditure is the category that will need more analysis.

Thanks (2)