Can Remortgage fees be offset against income tax?

arfur

I am completing self assessment for the first time for one property which is rented out. Income and outgoings are quite straightforward however I understand that remortgage fees can be offset against income tax and not capital gains but I am unsure on how to show this.

The property in question was bought a few years back and required repair before it could be let out. The initial mortgage costs and work to bring the house to a fit standard will be charged against CGT.

The house was remortgaged last year whilst being let and incurred a product fee charge by the mortgage lender which was added to the mortgage. The mortgage is interest only and the monthly interest payments (which include the interest incurred for the product fee) is offset against rental income, however can the product fee as a one off full payment also be charged against rental income in the year it was incurred? Or as it is added to the mortgage and the interest is being offset against rental should the product fee (the remortgage product fee as well as the initial purchase fee) be off set against capital gains?

If the remortgage fee can be offset against income tax does any adjustment need to be made for also offsetting the interest from the product fee against the rental income?

James_Trimby

Hi Interest is generally not allowed for capital gains tax. Normally the first period you mention is just a cost of investment and not allowed for any tax relief. (builing work etc is okay)
Now the good news! Bank charges are generally not allowed against rental income (unless you can show you are running a large rental business using a dedictated bank account.) BUT I would claim tax relief for the cost of refinancing whilst renting (or between rents) These costs should be spread over the life of the mortgage. If you have a 3 year lower period say, I would use the 3 years. IF not and it is say 20 years I would probably divide it by 5 and take the cost over the next 5 years as a reasonable apportionment on basis you will probably re mortgage / sell etc some time before you main mortgage ends.

Interest on this is therefore allowable so claim the full interest just add 1/5 of the charge to this cost over the next 5 years. I would argue that you were then being reasonable and fair and should revenue ever notice this and complain, which is very unlikely anyway.

arfur

Thanks James

In this case the product fee was £1200 and is for a 3 year period and therefore in simple terms this would be £400 per year to be offset against rental income. However does it matter though that the £1200 has been added to the mortgage and therefore the monthly interest payments include a portion of the £1200? Is this double counting? Does an adjustment have to be made for this?

James_Trimby

Hi arfur as the monies were spent on the mortgage for the rental property I wouldn't worry it is a bit debatable as if you paid it directly and took an overdraft to pay it I would probably not claim the overdraft interest!. BUT definately look at materiality. As a % of moretgage this must be very small and at 5% your're only looking at £60 per year extra interest any way. I would claim and I would not worry.

Rolo_Tomasi

Just to give another option - if your rents received are less than £15000pa then you can use the 'cash basis' to prepare your rental accounts. This would mean that the full £1200 product fee would be deductible in the year it was incurred.

It doesn't matter that the fee was added to the mortgage - you can still claim all of the interest.