INSPIRED can help you save tax on your property income

Many Airbnb owners aren’t aware that they could be claiming Capital Allowances in their Airbnb business. Capital Allowances reduce the taxable profits that a business makes and save tax.  However, with the Government’s announcement this week on how they plan to abolish these rules for Airbnb owners, the window to claim these allowances is closing.

A worked example of the potential tax saving for Airbnb owners is detailed below;

How is an Airbnb business taxed?

For tax purposes an Airbnb business is usually regarded as a ‘furnished holiday let’ (FHL). A FHL is a rental property that is fully furnished and available for short-term rental, primarily catering to tourists and holidaymakers. To qualify as an FHL, the property must meet specific criteria set out by HM Revenue & Customs (HMRC), such as being available for letting at least 210 days a year and actually let for at least 105 days.

Broadly speaking, properties listed on Airbnb and Booking.com, normally satisfy the criteria to be classed as an FHL.  Airbnb, for example, provides a year-end summary that can be referenced to ensure these criteria are met.

These FHL properties benefit from various tax advantages.  However, in a significant move to simplify property income tax rules, the UK government has announced the abolition of the furnished holiday lettings (FHL) tax regime, effective from April 2025. This change will align FHLs with other property businesses, ending several advantageous tax treatments previously available to them.

Key Changes:

1.Finance Cost Restrictions: FHLs will no longer be exempt from finance cost restrictions, aligning them with other property businesses.

2.Capital Allowances: The beneficial Capital Allowances that FHLs enjoyed will be removed. This includes allowances for furniture and fittings within holiday properties as well as fixtures embedded into the Property.

3.Capital Gains Tax Reliefs: FHLs will lose access to certain capital gains tax reliefs such as Business Asset Disposal Relief and rollover relief, impacting the tax payable on the sale of properties.

4.Income Reporting: FHLs will be subject to new income reporting requirements similar to other residential property businesses. This means property owners must adapt to the new rules for declaring rental income.

Government Rationale:

The government believes these changes will create a level playing field among property businesses, promoting fairness in the tax system. Additionally, this move is part of a broader effort to streamline and simplify tax regulations, making them easier to navigate for taxpayers and administrators alike.

A further related point, is that the influx in popularity of short-term rentals, in turn drives up local rents and property prices, making it difficult for locals to afford housing. The most prominent example that can be seen in the UK are the house prices in Cornwall and Devon where the average house price has increased by 55.8% in Cornwall and 45.3% in Devon during the period 2014 – 2024.

In contrast, the UK average house price increase in this period was only 31.1%. These figures are a clear demonstration of how the popularity of second homes (and the subsequent tax advantages available) have helped drive the purchase price of these properties up.

Much closer to home, we can see the short supply and abundant demand for second homes on the North Coast, with plenty of locals flagging the difficulty of getting onto the property ladder because of this.

While the abolition of FHLs was introduced by the Conservatives, the new Labour Government has enacted the removal of this relief and it is easy to see why they have followed through with the changes as they are certainly a relatively non-contentious policy issue to preside over.  Unless you have a property or second home yourself, operating as a FHL business, not too many voters will be sympathetic to these tax advantages being removed.

Impact on Property Owners:

Property owners currently benefiting from the FHL regime will need to prepare for these changes. This includes adjusting their financial planning and understanding the new allowable expenses and reliefs they can claim under the revised rules. Businesses will also need to update their accounting practices to comply with the new reporting requirements.

Capital Allowances opportunity for FHL owners:

Capital Allowances are a form of tax relief available to businesses when they purchase certain assets, such as machinery, equipment or vehicles.

In the UK, generally speaking under the ‘dwelling exclusion’, Capital Allowances cannot be claimed on residential properties. FHLs were however an exception to this exclusion. Nonetheless, with the draft legislation announced last week, the Government is stopping FHL owners from claiming Capital Allowances, regardless if the property is held personally or within a limited entity, from April 2025.

The good news though is that if you own an FHL and if you have not yet completed a Capital Allowances exercise, you will be able to claim the relevant Capital Allowances before April 2025 and benefit from a lower tax profile for many years to come.

As part of the FHL regime, Airbnb owners for example can claim Capital Allowances on qualifying assets. Items such a washing machines or fridges are easily identifiable and can be claimed by most accountants.  Less easy to spot are the Capital Allowances that can be claimed on ‘fixtures’ which are embedded into the fabric of the Property.  These fixtures include the likes of kitchens, bathrooms and mechanical & electrical installations. In most cases, these are higher-cost items.

The complexity here is two-fold,

• Establishing an entitlement to claim these fixtures
• Quantifying the value of these fixtures within a Property

Capital Allowances in relation to ‘fixtures’ are routinely overlooked due partly to an overall unawareness and then also the difficulty of quantifying the cost of these. Nevertheless, they provide valuable tax relief, in that they can shelter substantial profits from an FHL trade.

If you have acquired an FHL since April 2022, in the majority of cases the Annual Investment Allowance can be utilised, which will result in all Capital Allowances being claimed immediately in the first year.

In conclusion, if you have not claimed Capital Allowances in your FHL business, the clock is ticking on capturing the relief available.

INSPIRED is the leading tax incentives provider in Northern Ireland, with new offices opened this year in Dungiven and Holywood. Reach out to our team today to find out how you can maximise potential tax savings on your Airbnb property.

Contact Name: Patrick Pringle

Email: Patrick@inspiredca.com

Read the full article in the Belfast Telegraph here.