A buy-to-let mortgage can come with an arrangement fee as well as interest. If you let residential property as an individual, the way you record the fee can affect how you calculate your tax. HMRC includes fees and incidental costs of obtaining or repaying a mortgage or loan in its list of finance costs subject to the residential property restriction.
Keep borrowing costs separate in your records
For individual residential landlords who pay Income Tax, eligible finance costs can generally give rise to a basic-rate tax reduction. The reduction is worked out separately from the ordinary running expenses used to calculate rental profit. HMRC has examples that show why the amount of relief can depend on the wider calculation. A landlord should avoid treating every item on a completion statement as if it had the same tax treatment.
When taking out or replacing a loan, keep the mortgage offer, the lender’s fee statement and the completion documents. Record what each charge was for and whether you paid it separately or it was added to the balance. If a statement combines the lender’s charges with legal or valuation costs, keep an itemised copy so that an accountant can determine which amounts relate to arranging the finance.
Check who borrowed the money and why
This guide concerns individual landlords letting residential property. HMRC says companies sit outside this particular Income Tax restriction. If a loan covers both a residential let and commercial property, or also funds a trade, identify the amounts and purposes from the loan documents. HMRC’s guidance discusses apportionment where borrowing serves more than one purpose.
The timing of a fee can also matter, especially when a loan is refinanced or the property business uses a particular accounting basis. Give your accountant the documents from both the old and new loans and explain where any additional funds went. That lets them assess the fee in context and helps you compare the actual cost of mortgage offers before committing.
Sources
- [HMRC guidance on working out rental income](https://www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-working-out-your-rental-income)
- [HMRC examples for residential landlord finance cost relief](https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landlords-how-its-worked-out-including-case-studies)