Capital allowances after FHL abolition: existing pools and new spending

In short: The FHL income-tax and CGT regime ended on 6 April 2025 (1 April 2025 for corporation tax). Existing capital-allowance pools can continue to attract writing-down allowances. New spending inside an ordinary residential holiday let is treated differently — most furniture and equipment inside the dwelling is not qualifying capital expenditure. Replacement of Domestic Items Relief remains as a narrower route for like-for-like replacements. This piece answers three practical questions: what happens to an existing pool, what qualifies when you replace items, and when a specialist review is worth commissioning.

The FHL abolition is a year on, and the first full 2025/26 tax returns are being prepared for filing by 31 January 2027. For most STL owners the mortgage-interest restriction is the biggest headline change. The capital allowances position is quieter but has its own consequences — some obviously worse, some more mixed than the coverage suggests.

Below we work through the three questions in order.

What FHL used to give you

Under the FHL regime, a qualifying holiday let was treated as a trade for capital allowances purposes, which opened routes that a standard residential letting business could not use:

• Plant and machinery allowances on furniture, white goods, soft furnishings, kitchenware.
• Integral features allowances at the 6% special rate on electrical wiring, cold water systems, space heating, air conditioning, lifts.
• Annual Investment Allowance on qualifying additions, up to £1 million per year — 100% deduction in the year of expenditure (HMRC — capital allowances overview).
• Full expensing — a 100% first-year allowance on qualifying new and unused main-pool plant, available only to companies within the charge to corporation tax, and subject to leasing exclusions (HMRC — check if you can claim full expensing and 50% first-year allowances).
• Writing down allowances on expenditure that did not qualify for AIA or full expensing — main pool at 18% (falling to 14% from April 2026), special rate pool at 6% (HMRC — CA23200 Special Rate Pool and integral features).

A capital-allowances review on a mid-price self-catering acquisition often identified tens of thousands of pounds of qualifying plant, machinery and integral features. Where that expenditure produced tax relief, the tax saved was the allowance × the taxpayer's marginal rate — not the allowance itself. A £50,000 allowance in the hands of a higher-rate individual saved £20,000 in tax; in the hands of a Ltd company the saving was £50,000 × the applicable corporation-tax rate.

The FHL regime is now gone. What follows is the position on new spending, and then the position on existing pools and other surviving routes.

Question one — what happens to new spending inside the dwelling: section 35 CAA 2001

The reason capital allowances collapsed for STL operators on 6 April 2025 is not that Parliament removed the reliefs. The reliefs still exist. It is that STL properties, post-abolition, fall on the wrong side of a restriction that has been in the Capital Allowances Act 2001 since day one.

Section 35 CAA 2001:

"Expenditure is not qualifying expenditure if it is incurred in providing plant or machinery for use in a dwelling-house."

Under the FHL regime this restriction did not bite, because FHL was a defined qualifying activity in its own right — treated as a trade — and s.35 applied to the "ordinary property business" activity FHL sat outside. With FHL gone, the STL is a standard property business for capital-allowances purposes. Plant and machinery inside the dwelling is caught by s.35 and is not qualifying expenditure (legislation.gov.uk — Capital Allowances Act 2001).

What counts as a "dwelling-house" is the point most generalists get wrong. HMRC's guidance at CA11520 defines it by physical characteristics, not by use:

"A dwelling-house is a building, or a part of a building; its distinctive characteristic is its ability to afford to those who use it the facilities required for day-to-day private domestic existence (namely, bathroom and kitchen facilities and a place to rest and sleep)."

Included on HMRC's list: second homes, holiday accommodation, serviced apartments (short-term or long-term lets). Excluded: hotels operated as a trade, hospitals, care homes, hostels.

A whole-property short-term let — a self-catering cottage with a kitchen, bathroom and beds — sits within the included category. It is a dwelling-house under s.35 whether or not the operator markets it as "serviced accommodation".

The practical position after 6 April 2025: new plant and machinery expenditure inside the dwelling is not qualifying capital-allowances expenditure. Furniture, white goods and integral features inside the dwelling are all caught by s.35. Whether communal or back-of-house space genuinely falls outside the dwelling is a separate question of fact — see below. The presence of staff in a room, on its own, is not enough to take that room outside the dwelling classification.

Question two — what still qualifies

Four routes remain available, each with its own conditions. RDIR is its own route rather than a subset of capital allowances.

1. Pool balances brought forward

HMRC's clarification on the FHL abolition is explicit:

"Where qualifying capital expenditure has been included in a capital allowance pool by 5 April 2025, Writing Down Allowances, balancing allowances and charges can continue to be claimed after April 2025 on that pooled expenditure until it is used up or a small pool claim is made."

In plain terms: if the FHL had pooled expenditure at the applicable cutoff — 5 April 2025 for individuals; 31 March 2025 for companies within the charge to corporation tax — that pool continues to attract writing-down allowances at the applicable rate. Main pool 18% (falling to 14% from April 2026); special rate pool 6%.

If a 2025/26 return does not show writing-down allowances against pool balances that existed at 5 April 2025, ask your accountant to walk you through the pool reconciliation. Several legitimate explanations exist — there were no pool balances at 5 April 2025; the pool was cleared with a small-pool claim; the claim was legitimately restricted or omitted for the year (there is no obligation to claim the maximum WDA available; a lower claim can be a deliberate planning choice); or a prior-year disposal or balancing charge exhausted the pool. The reconciliation is the right ask, not an assumption of error from a single absent figure. Note: abolition of the FHL income-tax regime does not, by itself, mean the underlying property business ceased. The qualifying activity for capital-allowance purposes has changed, but the assets and business continue. That distinction matters when applying the transitional provisions.

2. Structures and Buildings Allowance (SBA), where the operation is genuinely non-residential

The SBA is a 3% straight-line allowance on qualifying construction cost of non-residential structures (HMRC — CA92600). Residential structures — including dwelling-houses as defined at CA11520 — are excluded.

For a standard whole-property short-term let, SBA does not apply. The dwelling-house test in s.35 (plant and machinery) and the residential exclusion for SBA are different tests, but both catch ordinary self-catering accommodation.

For a building to qualify for SBA, it must be a non-residential structure. The residential exclusion is drawn broadly. Staff accommodation is still residential — occupation by staff alone does not, by itself, make it non-residential. A separate laundry or plant room can be ancillary to residential accommodation (and thus outside SBA) even where physically detached. Physical separation, or non-guest use, is not the test on its own; the actual use of the building against the residential ancillary-use exclusion is what matters. See HMRC CA92500 and CA92600 on the exclusion. Get specialist advice before treating any ancillary building as an SBA route.

3. Communal and back-of-house plant, in genuinely non-dwelling space

Plant and machinery inside a genuinely non-dwelling structure (as above) sits outside s.35 and can attract the full P&M regime, including AIA. Full expensing is available only to companies within the charge to corporation tax, and only on qualifying new and unused main-pool plant, subject to leasing exclusions (HMRC — check if you can claim full expensing). It is not automatically available on incorporation of an existing STL portfolio.

This route rarely applies to a single-unit operator and is easy to over-claim. The presence of a staff room or a laundry inside a dwelling does not take those items outside s.35. What matters is whether the space is itself a dwelling.

4. The s.198 CAA 2001 fixtures election on acquisition or sale

Where a commercial property with pooled fixtures changes hands, a section 198 CAA 2001 joint fixtures election fixes the value at which the qualifying fixtures pass between seller and buyer for capital-allowances purposes. It is not mandatory on every transaction — its relevance depends on whether the seller had pooled fixtures that qualify for capital allowances, and on the underlying use.

Two points that matter for STL transactions:

• Where the seller had pool balances at 5 April 2025 that continue to attract writing-down allowances, a subsequent sale of the property is a disposal event for those pool balances. The s.198 election, where made, controls the disposal value; the alternative statutory routes (including default apportionment and the pooling requirement in s.187A) apply where no election is made.
• Missing the two-year election window can prevent a subsequent claim by the buyer, but the buyer's ability to claim historic fixtures depends first on the underlying use being one that would qualify at all. On an STL acquisition where the buyer's use is caught by s.35, an election does not create qualifying expenditure — it fixes the disposal side for the seller and (potentially) preserves options for the buyer where the use might change.

An s.198 election fixes the fixtures allocation between seller and buyer for capital-allowance purposes. It does not, by itself, prevent a balancing charge — the disposal adjustment depends on the elected value against the seller's pool position. Nor does it establish the buyer's own entitlement to capital allowances on the fixtures acquired; that turns on the underlying qualifying activity. Handled carefully as part of a transaction, the election controls the disposal value on the seller's side and the acquisition value on the buyer's side. Handled badly, it can create balancing-charge surprises for the seller and misplaced expectations for the buyer.

Replacement of Domestic Items Relief (RDIR) — its own category

RDIR is not a capital allowance. It is an income-tax deduction under Chapter 3A of Part 3 ITTOIA 2005, and it is the primary route for STL operators to deduct furniture and appliance replacements from rental profits after FHL abolition (HMRC — PIM3210).

Key conditions:

• Like-for-like only. Where the replacement is a genuine upgrade (a basic hob replaced with a professional-grade range), only the equivalent-quality cost is deductible; the uplift is treated as capital.
• Disposal proceeds netted off. Proceeds from selling the old item reduce the deduction.
• Initial furnishing not covered. The first furnishing of a newly-acquired property is capital and is not deductible as RDIR — and, because of s.35, is not qualifying for capital allowances either.
• For the tenant's use. RDIR is for items provided for the tenant's use in the dwelling.

RDIR is narrower than the old FHL position but it is not zero. It is the working relief for most ongoing furniture and appliance spending in a live STL business.

The trade versus investment line

Some operations do cross from residential letting into a trade for tax purposes — genuine aparthotel operations with on-site reception, meals or bar service, or a portfolio run with substantial services beyond bare accommodation. Where that line is crossed, the capital-allowances toolkit re-opens: full P&M, integral features, potentially SBA on qualifying structures.

The bar is genuinely high. HMRC's line, supported by tribunal decisions in this area, is that services need to go materially beyond what a landlord would ordinarily provide, and the operator's involvement needs to look like active running of a business rather than passive receipt of rent. Whether a specific operation crosses the line is fact-specific — some heavily-serviced setups have succeeded on the argument and many have not. For most whole-property STL operators running the argument on default facts, it is a route to enquiry rather than to a better tax outcome; where the operational reality does look genuinely trade-like, specialist advice on the specific evidence is the right route.

Question three — when is a specialist review worth commissioning?

A specialist capital-allowances review is worth commissioning where any of the following applies:

• The property was a qualifying FHL and had material capital expenditure pre-6 April 2025 that may have been pooled but not been checked since abolition. Pool balances continue to attract writing-down allowances; missing them is missed tax relief.
• The portfolio includes buildings that are genuinely non-residential in use — for example, a stand-alone plant room serving multiple units, or a reception building serving a hotel-style trading operation. Staff accommodation and detached laundries are usually still residential-ancillary; specialist review is needed on the specific facts before treating any building as an SBA route.
• The operation may have crossed into a trade on the facts. Getting the classification analysis right, before HMRC or a lender challenges it, is materially cheaper than getting it wrong.
• A transaction is pending (purchase or sale) and the s.198 election needs to be considered on the fixtures position.

Where none of the above applies, RDIR and standard property-business deductions are the working set of reliefs and a specialist review is unlikely to add value.

Retrospective claims — the narrowing window

For FHL-era expenditure not claimed at the time, the position is difficult.

The transitional preserves ongoing WDAs on pool balances established by the applicable cutoff (5 April 2025 individuals / 31 March 2025 companies). It does not, on its face, create a general route to add historic expenditure to a fresh pool after that date. Whether an unpooled item of qualifying expenditure incurred during the FHL period can be brought into a pool now depends on the qualifying activity at the time the expenditure was incurred and the applicable amendment window. Fixtures are a specific sub-question: section 187A CAA 2001 sets pooling conditions that apply to the fixtures element of a property acquisition — those conditions do not apply as a universal test to every historic non-fixtures item. Take specialist advice on the specific item and route before assuming either that the wider route is open or that it is closed.

The self-assessment amendment window is the harder constraint. For individuals, an amendment to the 2024/25 return can be made until 31 January 2027; the 2023/24 return closed to amendment on 31 January 2026. For companies, the equivalent window runs 12 months from the corporation-tax filing date. HMRC's discovery powers extend beyond the amendment window in defined circumstances, but discovery is not an amendment route.

If FHL-era capital allowances were not reviewed before April 2025, the amendment window on 2024/25 is now the practical opportunity — and it is finite. Book a consultation if this may apply to you.

What operators should do

1. Ask your accountant for a written statement of your capital-allowances pool balances at 5 April 2025 and the writing-down allowances claimed in your 2025/26 return. If they cannot produce this, or the return shows no WDAs against a portfolio that had material FHL-era expenditure, review is warranted.
2. Do not treat "no capital allowances, it is residential now" as the whole answer. Pool balances, RDIR and — where the facts support it — SBA and back-of-house plant may remain live.
3. On a transaction, consider s.198 on its merits — not automatically, and not as a magic bullet.
4. Where the operation has moved towards hospitality (aparthotel, on-site staff, substantial services), get a structural review before the next return. The tax and IHT implications of a trade classification are material.
5. Book a free 15-minute consultation. We can tell you, based on the shape of your portfolio, whether a capital-allowances review is likely to be worth commissioning.

Capital allowances after FHL abolition are a narrower and more nuanced area than they used to be. Capital-allowances review is included in the Gold monthly plan; the Bronze and Silver packages can add it as scoped additional work — see our plans for the full inclusions.

Book a free consultation to talk through your position.

Sources: HMRC — Clarification on abolition of the FHL regime; legislation.gov.uk — Capital Allowances Act 2001; HMRC — CA11520 meaning of dwelling-house; HMRC — CA92600 SBA and dwelling-house; HMRC — PIM3210 Replacement of Domestic Items Relief; HMRC — CA20006 P&M allowances outline; HMRC — CA26450 Fixtures — section 198 elections; HMRC — Capital allowances: full expensing; ICAS — capital allowances changes.