I would appreciate any help you can offer given the following scenario.
A client purchased a property in 2012/13 and bought furniture and white goods to let the property out as a holiday let. In the first tax period the property did not qualify as a furnished holiday let so was classed as an ordinary rental property. Accordingly the client claimed the 10% wear and tear allowance.
In 2013/2014 the property now qualifies under the FHL rules and the owner wants to claim the value of the white goods and furniture under capital allowances. My questions are therefore:-
i) Can the full value be claimed for capital allowances or has the previous claim for wear and tear allowances altered this? If the full value cannot be claimed what proportion of the value could be claimed.
ii) If capital allowances can be claimed can AIA be utilised as this is the first year the business has qualified under the FHL rules?
Any assistance with this question would be greatly appreciated.
Kind regards
John
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Replies (6)
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It is complicated, but you will not get AIA
Section 35 refers to a person carrying on a qualifying activity that is an ordinary property business.
It says that expenditure incurred by such a person on plant and machinery for use in a dwelling house.
In 2012/13 the client was carrying on a qualifying activity that was a property business. In 2012/13 the client incurred expenditure on plant and machinery for use in a dwelling house.
Section 35 says that that expenditure is not qualifying expenditure.
The fact that the qualifying activity in 2013/14 is an FHL does nothing to alter that analysis.
AIA is only available for the chargeable period in which the expenditure is incurred (section 51A(2)).
But wait! All is not lost. In 2013/14 we have a new qualifying activity; an FHL.
That means that either the ordinary property business qualifying activity ceased in 2013/14 or the assets left that qualifying activity and entered the FHL qualifying activity.
Either way, section 13 applies and you have deemed expenditure on the plant and machinery of its market value when it enters the FHL qualifying activity. There is no restriction for the W&T previously claimed, but inevitably, the furniture and white goods will have depreciated in value.
Deemed expenditure under section 13 is excluded from being AIA qualifying expenditure by exclusion 5 in section 38B.
Ignore any die-hards that insist on quoting from the Property Income Manual misguidance, that once you claim W&T you can only claim W&T. You cannot claim W&T for an FHL.
Last throw of dice?
Thank you for your answer Portia.
Would it make any difference if the client went back and amended their 12/13 tax return to exclude the W&T allowance? i.e. they just claimed capital allowances for 13/14? Would this then allow them to claim AIA in 13/14?
Also we may be undertaking a claim for the fixtures in the property which would not have been allowable when it was an ordinary rental property so could AIA be claimed on these?
Thanks very much for your help.
Kind regards
John.
Writing Down
Agree (I think) with Portia.
No AIA, but 18% wda from the start of the new activity on the value of the goods at that date.
You have thrown two ones!
The W&T allowance is a crimson kipper. The fact is that the expenditure was incurred while the ordinary property rental business activity was being carried on, and before the FHL qualifying activity was carried on (and for some purpose other than of the FHL qualifying - the purpose of the ordinary property rental business qualifying activity).
You still get deemed expenditure (even on your fixtures) under s 13, with the effect that AIA is precluded.
Why did the property not qualify as an FHL in 2012/13? What I mean is, was it, in fact, an FHL, but somebody got the rules wrong?
If the property was first let (furnished) in 2012/13, you need to look at the first 12 months of (furnished) letting to determine whether the availability and letting conditions are met; it is not necessarily limited to the tax year.
If you want AIA I would reexamine the FHL rules. If, as a matter of fact, the FHL definition was satisfied on a proper analysis, W&T should never have been claimed in any event.
Problem of a similar nature......
Any Advice on the following would be greatly received......
I am the proud owner of a FHL in sunny South Devon.
The property was a shell when bought and has been renovated since 2009.
The property was finished in 2 stages, so by 2010 we letting to customers and completed our
first tax return.
We have made losses each year until this year when we have turned our first profit.
As a result we have amassed a lot of losses through 100% AIA and annual losses.
We do bob around the new requirements for no of weeks let and this is slowly increasing.
My question is do we keep carrying forward the AIA Capital Allowance losses or is there a time limit on this?
Many thanks