Are mortgage arrangement fees off-settable against tax?

by Readers Question

10:44 AM, 13th August 2014
About 4 years ago

Are mortgage arrangement fees off-settable against tax?

Make Text Bigger
Are mortgage arrangement fees off-settable against tax?

Are mortgage arrangement fees off-settable against tax?

I was inspired to ask this question based on the article that Mark Alexander wrote this morning about one very arrogant member thinks he who knows it all. The article was entitled “Naive Question From Landlords” [link]

Perhaps he can enlighten me?

The most recent arrangement fee quoted to me for an interest only BTL mortgage was at the top end of the range – £4,000 for a £160,000 mortgage.

I know that interest is off-settable against rental profits but what about arrangement fees?

Many thanks

Ian



Comments

Mark Alexander

11:44 AM, 13th August 2014
About 4 years ago

Hi Ian

My understanding is that lenders arrangement fees on new mortgages for property purchases do not attract tax relief but the fees do attract tax relief for remortgages. Son't take my word for this though, please check with a qualified tax adviser who has professional indemnity covering the advice provided and make sure you get it in writing. This is the member profile for my accountant >>> http://www.property118.com/member/?id=452

I also met with another tax specialist once who discussed a tax planning strategy which he called "fee for margin swap". I was a bit nervous of it though because HMRC hadn't challenged in in Court at the time but that may have changed now as it was several years ago. In simple terms the theory was that two quotes would be obtained, one for a low rate with a high fee, the other for a higher rate with a lower fee. If the quote with the low rate and higher fee was the one progressed then the argument to HMRC would be that a commercial decision was based on the overall package of charges over X years and that the higher fee was in consideration of the lower interest charge. The difference between the two fees would then be claimed as a legitimate expense as a "fee for margin swap".

I hope that helps 🙂
.

Romain Garcin

14:20 PM, 13th August 2014
About 4 years ago

Cost of arranging finance (arrangement fee, broker fee, valuation fee, etc) is an allowable expense be it for purchase or re-mortgage, I believe.

In principle it should be amortised over the term of the loan, however if the amount is small compared to the interests (which is usually the case), my understanding is that HMRC accepts that the whole fee be expensed in the tax year it is i curred.

Mark Alexander

18:52 PM, 13th August 2014
About 4 years ago

Reply to the comment left by "Romain " at "13/08/2014 - 14:20":

That's not how if works with legal fees either so far as I know. Purchase costs are capitalised, refinance costs are allowed to be offset against P&L.

I will ask my accountant to confirm. Apologies in advance if I'm wrong but I don't think I am.
.

Neil Barlow FCCA ATT

11:26 AM, 14th August 2014
About 4 years ago

Hi Mark and Ian,

All finance costs incurred in respect of the purchase of a buy to let rental property are an allowable revenue deduction. This includes the arrangement fees and broker costs etc.

Accounting standards allow a claim for the full revenue deduction in the year the arrangement fees are incurred (rather than spreading over the life of the mortgage) provided that the fees are not significant when compared to the interest charged over the life of the mortgage. It is therefore not normally necessary to spread the revenue deduction for the arrangement fees.

Mark Alexander

11:29 AM, 14th August 2014
About 4 years ago

Reply to the comment left by "Neil Barlow FCCA ATT" at "14/08/2014 - 11:26":

Thank you Neil, it appears Romain was right then.

I can't help wondering why I thought otherwise. Is it different for legal fees perhaps?
.

Neil Barlow FCCA ATT

11:39 AM, 14th August 2014
About 4 years ago

Reply to the comment left by "Mark Alexander" at "14/08/2014 - 11:29":

Hi Mark,

Legal fees for the purchase of the property are capital. However, we have come across one solicitor who was happy to split his fee between the conveyance (therefore capital) and dealing with the finance (therefore revenue).

Mark Alexander

11:44 AM, 14th August 2014
About 4 years ago

Reply to the comment left by "Neil Barlow FCCA ATT" at "14/08/2014 - 11:39":

Thank you Neil, that now explains how my confusion occurred.

Thank you for clearing up this matter and for providing the definitive answer to Ian's question 🙂
.

Romain Garcin

20:06 PM, 14th August 2014
About 4 years ago

Reply to the comment left by "Neil Barlow FCCA ATT" at "14/08/2014 - 11:39":

Yes, if the solicitor also acts for the lender it is always worth requesting a detailed invoice in order to be able to split between conveyance and cost of obtaining finance, if he does not provide it as a matter of course.

Mark Alexander

22:06 PM, 15th August 2014
About 4 years ago

Reply to the comment left by "Romain " at "14/08/2014 - 20:06":

Hi Romain

Something about this is still bugging me.

"The rental business commences when the first property is let, not when it is bought." - you said it yourself here >>> http://www.property118.com/tax-property-business-7-year-rule-business-travel/65695/#comment-41498
.

Romain Garcin

8:00 AM, 16th August 2014
About 4 years ago

Reply to the comment left by "Mark Alexander" at "15/08/2014 - 22:06":

Hi Mark,

Everything stays on the record, I see 😉

My understanding is indeed that the business starts when the first property is let, which means that any issues with financing costs should only relate to the first property.

In any case, it is possible to claim for pre-trading expenses incurred up to 7 years before the business started, which covers financing costs as long as the property is bought exclusively for the purpose of letting it.

This is based on PIM2505:
http://www.hmrc.gov.uk/manuals/pimmanual/pim2505.htm

1 2

Leave Comments

Please Log-In OR Become a member to reply to comments or subscribe to new comment notifications.

Forgotten your password?

OR

BECOME A MEMBER

Variation of lease to rectify adverse possession?

The Landlords Union

Become a Member, it's FREE

Our mission is to facilitate the sharing of best practice amongst UK landlords, tenants and letting agents

Learn More