Although income from a FHL is declared as property income on an individual’s tax return, it is treated as trading income. Consequently trading expenses in running the FHL can be set off against such income. The FHL can be in the UK or the EEC so for example a holiday villa in Spain can count as a FHL.
WHAT TYPES OF TRADING EXPENSES CAN BE CLAIMED?
- Marketing/Advertising – this includes setting up a website, advertising in brochures etc.
- Heat & Light – gas, electricity and coal etc
- Cleaning and laundry – including washing up liquid, bleach, toilet rolls plus laundry services etc.
- Telephone – you will need a phone to make calls with regard to letting the FHL.
- Repairs and Renewals: including expenses incurred in the general maintenance and upkeep of the property such as painting and decorating.
- Insurance – such as buildings, contents and public liability
- Interest – interest on a loan to purchase or improve the FHL – note it is only the interest that can be offset and not the capital repayments. From 5 April, 2016 HMRC restricted the deductibility of finance costs against a residential letting property but this restriction does not apply to an FHL
- Letting Agents Fees – you may decide to use a holiday letting agent to deal with the FHL.
- Accounting Fees – you the cost of preparing your tax return to declare your income and expenditure from your FHL
- Travelling expenses – you can claim mileage at the fixed mileage rate to and from the property provided it relates purely to running the FHL and is not mixed with private travel. You need to keep a mileage log.
If the property is used privately for part of the year then the expenses will need to be apportioned between private and business use on a reasonable basis.
WHAT CAN BE CLAIMED ON CAPITAL EXPENDITURE?
Tax relief can be claimed on capital expenditure via what are known as capital allowances.
Capital allowances can be claimed on moveable items such as furniture, white goods, carpets and electrical goods such as TVs etc.
Currently the first £200K of capital expenditure can qualify for 100% tax relief under the Annual Investment Allowance rules.
Something that is often missed however is that capital allowances can also be claimed on plant and machinery fixed into the holiday letting property itself. In tax terms there are two types. Firstly there are integral plant/fixtures which include sanitary ware, integrated kitchen equipment etc. Secondly there are integral features which are things like the electrical system, central heating, hot and cold water systems, air conditioning etc.
Plant/fixtures get a tax writing down allowance of 18% whilst features get a lower rate of writing down allowance of 8%. However, as long as the capital spend on these two categories along with that on movable items is not more than £200,000, Annual Investment Allowance can be claimed giving 100% tax relief on the whole spend.
Integral items can amount to 10% to 20% of the whole cost of the FHL property when purchased. However for a high specification property overseas in the EEC e.g. Spain which has air conditioning and swimming pools, the integral items can account for up to 30% of the purchase price.
Again if there is private use of the FHL the claim to capital allowances needs to be restricted to business use only.