Mortgage fees for a BTL mortgage arranged during the previous tax year

by Readers Question

11:02 AM, 4th August 2016
About 2 years ago

Mortgage fees for a BTL mortgage arranged during the previous tax year

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Mortgage fees for a BTL mortgage arranged during the previous tax year

I started receiving rental income in May 2015 and will therefore need to do a Self-Assessment in the months to come (I’ve only just informed HMRC).tax year

However, my mortgage was arranged in December 2014. As expected, the arrangement fees were not negligible. Can I obtain any type of tax relief for those fees? Should I have performed a Self-Assessment last year for the 2014-2015? I possibly mistakenly thought that I would only need to start the Self-Assessment once I started obtaining rental income.

Any advice would be greatly appreciated.

Sam



Comments

Neil Patterson

11:09 AM, 4th August 2016
About 2 years ago

Hi Sam,

Please see our page on Tax returns - 10 common mistakes >> https://www.property118.com/landlords-tax-returns-10-common-mistakes/61630/

You can only claim mortgage interest against income as other costs are a capital expense.

I think maybe it would have been helpful to complete a tax return for the previous year, but I don't think this will be disastrous. I would certainly consider employing a good accountant as they can normally at least save you what they cost 🙂

Sam TheMan

11:25 AM, 4th August 2016
About 2 years ago

Thanks for the reply and thanks for pointing out those common mistakes. Those wouldn't be wasted on a newbie like me. However, I'm not looking to claim any legal fees. Obviously I understand that that would not be tax deductible.

I read the HMRC Property Rental Toolkit and as I think you agree, the arrangement fees should be tax deductible. How do people handle tax relief or changes in their declarations for the previous year?
Obviously, I'm going to get in contact with a tax accountant now..

https://www.gov.uk/government/publications/hmrc-property-rental-toolkit

8. Have any legal and other professional fees incurred in acquiring an asset been
allocated appropriately?

Generally, fees are capital if they relate to a capital matter, such as the purchase of property.
Therefore costs incurred in respect of acquiring, adding to or selling an asset are normally capital, for example fees paid to a surveyor/valuer, planning permission or registration of title on a property purchase.
The incidental costs of obtaining finance that are wholly and exclusively incurred for the purpose of acquiring the property are normally allowable.

Michael Barnes

14:18 PM, 4th August 2016
About 2 years ago

It is my understanding that
A) a lettings business does not start for tax purposes until the first letting of a property.
B) All costs incurred before the date the business started are 'put on the books' for tax purposes on the date the business started (and there is a limit to the age of the expense; I think, but have no evidence to hand, that it is of the order of 5 years).

Therefore
1) there was no need to do a tax return for the previous year as you had no lettings income, and
2) the 2014 fees (cost of arranging finance) are allowable against 2015 lettings income.

Michael Barnes

14:23 PM, 4th August 2016
About 2 years ago

Reply to the comment left by "Sam TheMan" at "04/08/2016 - 11:25":

Legal fees are tax-deductible, but against Capital Gains Tax, not Income Tax.

Therefore keep all your records for purchase expenses for the time when you sell the property.

Capital Gain = [selling price] - [purchase price] - [purchase expenses] - [selling expenses]

Sam TheMan

17:02 PM, 4th August 2016
About 2 years ago

Appreciate your advice. It is reassuring to hear that these pre-business start costs can potentially be claimed for the 2014-2015 tax year.
Won't HMRC ask me to mention these pre-business start costs such as the mortgage fees in a separate Self-Assessment for 2013-2014?

Simon M

20:05 PM, 4th August 2016
About 2 years ago

I had the same question when I started a couple of years ago & have the same understanding as Michael. HMRC don't accept the BTL as a business until you let the property and start to receive rent. You could deduct costs from income in the same year if you were already letting another property. For a first property not let, HMRC will accept costs chargeable against income from the previous year once the property is let. As I understand you should definitely not put them in the earlier year's return - and I didn't.

I started preparing accounts myself but found there were many more questions and it was taking many hours to research & interpret what is and is not allowable. It's good advice to consider using an accountant particularly if you might do serious renovations or buy more property in future. It's saved me many evenings and weekends and I can be confident HMRC won't find anything of interest if they decide to launch a tax investigation!


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