Treatment of Capital Allowance on Commercial Lettings

Dear Jill,

I do understand that capital allowances are available on commercial lets instead of the replacement furniture relief BUT it (capital allowance) is only available if the question is on an ACCRUAL BASIS,
However, the question below (extracted from the Study Hub – Section 3.1.9) is “silent” therefore, the default cash basis must be used, and if the CASH BASIS is used, Mark should not claim capital allowance.

Please examine the question and its solution below and explain why capital allowance is treated as an allowable deduction.

THE QUESTION:

Mark owns a house in the UK that is let on a commercial basis and satisfies the conditions to be treated as furnished holiday letting for tax purposes. Relevant details for the tax year 2023-24 are:

£ £
Rents due and received 35,000
Allowable expenses:
Letting agency fees 5,000
Cleaning and repairs 2,500
Council tax 1,000
Water charges 250
Insurance 150
(8,900)
26,100
?
Capital allowances on furniture and fittings for the house amounted to £7,000 for the tax year 2023-24. Mark and his family use the house for two months each year.

Required:

Calculate the amount of assessable property income arising from the letting of the furnished holiday accommodation in the tax year 2023-24 and state how the amount will be shown in the income tax computation.

THE SOLUTION:

Furnished holiday accommodation business profit computation, 2023-24

£ £
Rental income 35,000
Less: Allowable expenses
Letting agency fees 5,000
Other £3,900 × 10?12 3,250
Capital allowances £7,000 x 10?12 5,833
(14,083)
Assessable property income (profit) 20,917
?
The profit from the FHA is earned income and will be shown as property income in Mark’s income tax computation.

Note: The allowable expenses are restricted as Mark and his family use the house for two months of the year.