Are BTL Mortgage Fees Tax Deductible (“allowable expense”)?

MAKE IT STOP!

Hahaha, what in the actual fuck? How the hell is that helpful to anyone? It’s a total car crash.

The admins are not only contradicting themselves, but also using points of reference that are exclusively for commercial and corporation settings, even though the landlords, including the original question, are clearly enquiring about self-assessment.

If that’s what’s on offer, I’d personally stay clear of the HMRC community forums for any meaningful advice, but rather – and much like this blog – a source of entertainment and unapologetic silliness.

Why was the penis sad? It had a hard day at the office.

Make no mistake, that’s the bar I’ve set for around here, and going forward – after reading that thread – I’m going to hold HMRC community forums to similar standards. I suggest you do the same.

I laugh, but it’s actually quite dangerous, because I imagine many landlords will read the thread and take the information as gospel since it’s coming from HMRC mouth-pieces. Needless to say, HMRC is a “trustworthy” authority, even if only optically, so I’m sure the thread attracts a lot of eyeballs simply by organically ranking well in search engines for keywords based around filing tax returns and offsetting mortgage costs. Not cool.

I must admit, even though I was pretty confident that any costs related to accessing finance was not an allowable expense, that thread did make me question my better judgement. And therein lies the danger.

Fortunately I had the good sense to take a step back, gather my thoughts, and double-check. Not everyone will do the same.

Why I believe BTL Mortgage Application or Arrangement Fees are NOT an “allowance expense”

1) Critical thinking: if mortgage fees were an allowable expense, it would create a massive loophole

As many of you already know, after Section 24 finished rolling out in 2021, landlords have been prohibited from offsetting “finance costs” (e.g. interest payments on mortgages) against taxable rental profits.

If Section 24 excluded arrangement fees (or any other incidental fee) from the definition of “finance costs”, then mortgage lenders would simply release products that had exceptionally high fees, with zero interest rates, effectively bypassing Section 24.

So, like, it wouldn’t make sense.

2) The definition of “finance costs” (which expenses are not tax deductible under Section 24)

Section 24 specifically states that “finance costs” are no longer tax deductible, but that in itself is too ambiguous to be meaningful. So let’s be sensible and look up the definition.

As per the HMRC Property Income Manual (PIM2054):

Interest and other finance costs on loans taken out for a property business which involves the letting of residential properties.

Any payments which, although not described as interest, are made in connection with a relevant loan and are economically equivalent to interest in the hands of the recipient.

Any incidental costs incurred in obtaining the loan. This includes items such as fees or commission payments, but would exclude, for instance, exchange rate losses on a loan taken out in a currency other than sterling.

As per the Gov guide on “Work out your rental income when you let property”

Finance costs restricted

Finance costs restricted include interest on:

BOOM!

(I’m not finished yet either)

3) Section 24 & 58 legislation

I really didn’t want to do this, to pull out the big guns, but I feel like it’s the only way we’re going to put a nail in this re-donk-ulous coffin.

Let’s take a look at the source of our misery in all it’s glory:

The much-despised Section 24 Act states the following:

Section 24(2)(4) In calculating the profits of a property business for income tax purposes for the tax year 2020-21 or any subsequent tax year, no deduction is allowed for costs of a dwelling-related loan.

It defines the costs of a dwelling-related loan as the following:

(5) “Costs”, in relation to a dwelling-related loan, means –
(a) interest on the loan,
(b) an amount in connection with the loan that, for the person receiving or entitled to the amount, is a return in relation to the loan which is economically equivalent to interest, or
(c) incidental costs of obtaining finance by means of the loan.

(6)Section 58(2) to (4) (meaning of “incidental costs of obtaining finance”) apply for the purposes of subsection (5)(c).

So what Section 24 states is that “incidental costs of obtaining finance” are no longer an allowable expense from 2021, and that the definition can be found in Section 58.

Now, if we hop over to Section 58 (to find out what “incidental costs of obtaining finance” means), we’ll find that it states the following:

(2) “Incidental costs of obtaining finance” means expenses –

(a) which are incurred on fees, commissions, advertising, printing and other incidental matters, and
(b) which are incurred wholly and exclusively for the purpose of obtaining the finance, providing security for it or repaying it.

(3) Expenses incurred wholly and exclusively for the purpose of –

(a) obtaining finance, or
(b) providing security for it,

In other words, any fees or commissions paid for obtaining finance (for a dwelling-related loan) is an “incidental cost” and therefore not tax deductible according to Section 24.

I rest my case! What do you say to that, HMRC Admin 20, HMRC Admin 25, HMRC Admin 5, HMRC Admin 19?

But obviously don’t take my word for it.

Is anyone else in doubt? If so, feel free to explain why (but please, for the love of God, don’t reference anything on the HMRC community forums as a resource – I’ll vomit).

Landlord out xo