Tax advantages, or not, of a large arrangement fee on a BTL mortgage

pinchmyself

I have sufficient equity on a BTL mortgage to either pay a large arrangement fee which in turn gives me a very good monthly repayment, or a small arrangement fee with a small monthly reduction in my current monthly pay. I do not have the brain power to work out which is more beneficial to my tax position ? If I add around 5k to the current borrowing and save around £4500 in monthly payments over 2 years, which is more tax efficient, or go to nil addition to the borrowing but pay a similar monthly payment? We intend to keep the property till we snuff it as purely an income generator. My wife and I are on standard rates of tax currently and only receive 20% relief on our interest only BTL repayments....anyone any idea?

Hoenir

Some figures would help. 

The mortgage amount.

The products you are considering. 

ACG

Do you have an accountant? 

pinchmyself

ACG said:

Do you have an accountant? 

I do, but they are more book keepers than accountants

pinchmyself

ACG said:

Do you have an accountant? 

Hoenir said:

Some figures would help. 

The mortgage amount.

The products you are considering. 

The loan amount is £190,000

amnblog

If you look at the fees as a % of your borrowing you will see that two of the three fee charged products work out more expensive over the two year period.

3% = 1.5% PY = 3.59% + 1.5% = 5.09%
£3,995= 2.1% = 1.05% PY = 4.14% + 1.05% = 5.15%
£1,495 = 0.79% = 0.40% PY = 4.39% + 0.40% = 4.79%

The £1,495 fee product is mathematically less expensive than the 4.89% no fee rate (assuming you do not add the fee and incur interest on it) - but not enough to make it worthwhile.

The other rates (if you add the fee) give you a cash flow advantage, but will cost more overall.

As regard taxation benefits of paying a fee, that is a question for your Accountant.

pinchmyself

Yep, I get that. So what I need to know is should I add the arrangement fee to the borrowings, would that fee be 100% allowable against my tax bill which if I can would be far more tax efficient to go for the most expensive arrangement fee

silvercar

pinchmyself said:

Yep, I get that. So what I need to know is should I add the arrangement fee to the borrowings, would that fee be 100% allowable against my tax bill which if I can would be far more tax efficient to go for the most expensive arrangement fee

My understanding is that, if you are not paying the fee but adding it to the mortgage, only the interest you are charged would be allowable against your tax bill (restricted to basic rate as it is mortgage interest). If you paid the fee up front it would be an expense of letting and so allowable. I would think that as it’s a finance cost, it would be restricted to basic rate. Ask on the tax board to be sure.

pinchmyself

So I have just received a reply from my accountant. Apparently even if I add the arrangement fee to the current loan, it is still allowable along with the interest payments on the loan 

"The mortgage arrangement fee is an allowable cost against your rental income along with the interest charges.

The tax relief on this fee is therefore restricted to the basic rate of income tax as has been the case for several years now "

So surely it is a no brainer to take the largest arrangement fee which will give me the lowest monthly payment as not only is the fee allowable, even if I add it to the current loan as not only will give me a fixed reduction on those monthly and at 3%, given I only have a LTV at around 37% currently, with the capital growth of the property I will still be in front say at the 3 year fixed deal ?

silvercar

It’s allowable if you pay it. If you don’t pay it but add it to the loan, then the interest on it is allowable as that is what you will be paying.

Paying it will impact your cash flow.

pinchmyself

silvercar said:

It’s allowable if you pay it. If you don’t pay it but add it to the loan, then the interest on it is allowable as that is what you will be paying.

Paying it will impact your cash flow.

You will get a 20% allowance on your tax for the fee, even if you add it to your mortgage loan.