James Bailey points out that when taking out a loan to acquire a letting property, it is not just the interest that can potentially be claimed as an expense.
The interest on a loan used to buy a property for letting is an allowable expense against the rental income from the property, as would be the interest on a loan for any other purpose central to the property letting business, such as repairs. The same applies to the costs of obtaining such a loan.
The costs of obtaining loan finance that can be included as allowable expenses of the property business are set out in the tax legislation (s 58 ITTOIA 2005), and they include:
- legal and professional expenses for negotiating the loan and preparing the documents;
- underwriting commissions, brokerage and introduction fees;
- Land Registry fees, search fees and valuer’s fees incurred in connection with the security for the loan;
- commitment fees for an undertaking to make a loan available;
- commissions for guaranteeing a loan;
- costs of advertising or placing a loan stock issue and the miscellaneous costs of issuing a prospectus, postage etc;
- costs of securing a Stock Exchange quotation for a loan stock; and
- costs of ‘rolling over’, extending, replacing, varying the terms of, or changing the security on, an existing loan.
Categories 6 and 7 are unlikely to be relevant to a normal property business, but any of the others may figure in your costs.
Capital expenditure
Because the cost of acquiring the property itself is capital expenditure and is not allowed as a deduction against the rental income, it is important to distinguish expenses of obtaining the loan from those involved in obtaining the property itself. For example, the solicitor’s fees for doing the usual searches and for conveying the property to you are not allowable; only search fees and other legal costs related to the granting of the loan can be claimed.
Early repayment penalties
If you repay your property loan early, either because you replace it with another loan or because you can afford simply to repay it, the lender may charge a penalty of some kind. HMRC used to resist allowing such penalties as an expense of the business, but they now accept that in most cases they are allowable.
Section 58 excludes ‘premiums’ from the allowable costs of loan finance, and certain payments at the termination of a loan may in fact be premiums, but these are unlikely to figure in a property business and most normal repayment penalties (usually but not always measured in terms of a certain number of months’ interest) should be allowable.
‘Loan relationships’
The ‘loan finance’ legislation in section 58 applies to income tax. If you operate through a limited company it does not apply; instead, the rules for ‘loan relationships’ come into play. For practical purposes, these are likely to produce the same result, and the cost of bringing a loan relationship into existence is an allowable expense, as are payments made under the terms of that loan relationship – such as interest and early repayment penalties.
Costs added to loan
It is a common practice for the lender to add the costs of setting up a loan to the loan itself, so that the money borrowed represents partly the cost of the property itself, and partly the costs of obtaining the loan. Provided these costs are allowable as described above, the interest on the part of the loan associated with them is also allowable.
Practical Tip:
Keep records of the costs of borrowing for your property business, as these costs can be claimed against the rental income.
