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Tax Matters: Costs of arranging financing on your BTL.

11th Sep 2012

Category: Opinion

Tagged:tax, Legislation

Any fees that are incurred in arranging finance can be deducted against income tax - the next question is when?

If the finance is for 10 years, then you deduct the applicable fees over 10 years on a straight line basis, this is called 'amortising':

Example: I pay a lender an arrangement fee of £1,000, a valuation fee (for the purposes of valuing the property to determine how much the lender will value it at) of £500 and a proportion of the solicitors costs to administer the above £200. Other costs may have been a home buyers report, search fees and solicitor fees in association with the conveyancing work, totalling £1,100.

In this example, the individual has incurred £1,700 of costs that relate directly to the financing arrangement. Financing is a legitimate business expense of the lettings business and is deductible against income tax. The financing was for 10 years, so the taxpayer will deduct £170* (£1,700 divided by 10 years) each and every tax year until the end of the financing agreement. If the taxpayer swaps financing after having had it for three years, they would have claimed 3 x £170 = £510 of expense through their self assessment. The original £1,700 that paid for the 10 years of financing now only appears to have paid for 3 years, and since then the borrower has incurred other costs to arrange the new financing. The taxpayer therefore claims the balance (£1,700 - £510) of £1,190 in the year of the rearranged finance along with the first years amortised amount from the new financing deal.

The £1,100 spent on conveyancing and legals surrounding the capital purchase of the property (not costs associated with arranging the financing) will be noted and kept to one side to add to the 'base cost' of the asset. This will be relevant at the time of sale, and when the Capital Gains Tax liability is being calculated.

Hope this helps.

*Assuming tax year is aligned with the borrowing year, i.e. borrowing was taken out on 6 April. You may need to pro-rata this amount if the years do not align.

Phil Ashford

Partner MEng(Hons) ACA MARLA

An experienced Chartered Accountant and a Founding Partner of Comfort Lettings.

Connect with me on Linkedin


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