Landlord Products / Services
Oh boy. Here we go again!
I have discovered yet another example of how duff information is being peddled by seemingly “authoritative” sources – the HMRC Community Forums this time – and as a result, I believe many landlords will be potentially filing their self-assessment tax returns incorrectly. It’s a damn shitshow out there.
The question(s) for today:
- Are mortgage fees (e.g. application, arrangement, broker, commission etc.) an “allowable expense”?
- Can landlords offset them against their tax liability?
In short, I certainly think not (and I’ll explain why, despite what the HMRC Community Forums say).
Before I take one step further, of course, I need to flaunt my obligatory disclaimer: this content is for informational purposes only, so you should not construe any such information as legal, tax, investment or financial advice. I am not qualified to offer any financial or tax advice, so you should definitely consult with a qualified professional if that’s what you’re after! Ya dig it? Cool beans.
HMRC Community Forum Admins giving bogus tax advice to landlords?
A landlord recently left a comment in my List Of Tax Deductible Expenses For Landlords blog post, enquiring whether BTL mortgage arrangement fees are an “allowable expense”
I hadn’t listed it as one, and there’s a reason for that. Simply, I don’t believe they are.
However, the landlord was confident that they are an allowable expense, but she became confused after reading the conflicting and mindless drivel in this thread on the HMRC Community Forums, titled, “Can mortgage fees be ‘allowable expenses’ on my self assessment?”.
The HMRC Community Forums described in their own words:
Our customer forum is for you, with all the help, support and guidance you need. You can ask questions, see what others are asking and get the answers and top tips on a range of topics including VAT, self-employment, Self Assessment or being an employer.
Sounds fab. Now let’s put this sucker to the test.
The thread in question consists of a few landlords asking the same question in various forms – all related to filing their self-assessment tax return and offsetting mortgage fees – and with several official HMRC admins chiming in. The litany of “support” provided is hilariously sloppy at best, catastrophic [for landlords] at worst.
- HMRC Admin 20 states that “From the year 2020/21, no deductions in respect of interest and other finance costs on loans to buy residential let properties are allowed in calculating the profits”
Correct.
But then, rather bizarrely, HMRC Admin 20 goes onto referencing PIM2052, stating that it “confirms that incidental costs incurred in obtaining loan finance for a rental business are generally deductible in computing rental business profits”
It’s very confusing, least of all because PIM2052 only applies to Corporation Tax, not income tax, and no distinction is ever made.
- HMRC Admin 25 says “Yes, you can claim the costs of getting a loan or alternative finance to buy a property that you let” and then links to the UK property notes (2022) as a point of reference, which actually doesn’t mention anything of the sort, but rather a generic statement, “You can claim for the running costs of your rental business.”
- HMRC Admin 5 references PIM2105, stating, “incidental costs incurred in obtaining loan finance for a rental business are generally deductible in computing rental business profits provided they relate wholly and exclusively to property let out on a commercial basis.”
Again, another Admin that’s referencing irrelevant information, since this clearly only applies to commercial settings.
- HMRC Admin 19 states “Yes. these can be claimed as expenses, use the legal management and other professional fees box.”
- HMRC Admin 10 states that, “No, not as allowable expenses.”
This is the first and only admin that clearly states costs associated to acquiring finance is not tax deductible, but they don’t provide any reference points.
- mortgages
- loans – including loans to buy furnishings
- overdrafts
- alternative finance returns
- fees and any other incidental costs for getting or repaying mortgages and loans
- discounts, premiums and disguised interest
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 laugh, but it’s potentially a quite dangerous situation, because I imagine many landlords will read the thread and take the information as gospel since it’s coming from HMRC mouth-piece. Of course, which Admin they listen to is anyone’s guess.
Needless to say, HMRC is a “trustworthy” authority, even if only optically, so it’s not surprising to see that the thread organically ranks well in search engines for keywords based around filing tax returns and offsetting mortgage costs. Lambs to the slaughter. Not cool.
In all fairness to HMRC (because we have to be fair, otherwise we’re just animals), they do arm themselves with all the right disclaimers in their Terms & Conditions, protecting themselves against liability, which I’m sure will be very comforting to know.
Information on these Forums, including information provided by HMRC, may be incorrect, out of context, out of date, or may not apply in all circumstances. Always check the official HMRC guidance.
I must admit, even though I was pretty confident that this was one of those times, when the information is incorrect, the thread did make me question my better judgement. And therein lies the danger.
Fortunately, momma didn’t raise no fool, so I had the good sense to take a step back, gather my thoughts, and double-check. Alas, some mommas will be walking around with fools.
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 product and 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 altogether.
So, like, it wouldn’t make sense.
This is probably why “finance costs” across the board are not spared from the jaws of Section 24.
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:
Other costs affected are:
BOOM! There it is!
I almost rest my case.
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?
If I’m right, a big concern is that landlords will opt for mortgage products with hefty fees, thinking they can offset it as an expense – because of that schizophrenic forum thread.
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).
Update: A few people in the comments have understandably mentioned the 20% tax relief available under S24 for interest payments and finance costs (which I have discussed in my main Section 24 blog post already). So to clarify, the purpose of this blog post is to highlight that mortgage fees in itself is not an “allowance expense” according to the legislation (i.e. you can’t offset a £2,000 mortgage application fee), at least from what I can tell. There’s a fundamental difference between tax credits and an expense being tax deductible, which is why I didn’t mention it. Plus, I didn’t want to get too caught up in the weeds of Section 24 in itself.
Landlord out xo
P.s. What do you call the useless piece of skin on a penis? The man.
A reminder of my bar.
Disclaimer: I'm just a landlord blogger; I'm 100% not qualified to give legal or financial advice. I'm a doofus. Any information I share is my unqualified opinion, and should never be construed as professional legal or financial advice. You should definitely get advice from a qualified professional for any legal or financial matters. For more information, please read my full disclaimer.
Yes but there’s a 20% rebate on loans fur basic rates taxpayer’s wouldn’t any costs for refinancing but allowed under that.. I haven’t used a broker this time so it’s academic