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  • Tax

    Mortgage product fees

    I have a choice of taking £170,000  2 year fixed mortgage at: 1.89% + 1999 product fee, or 2.89% with no fee.

    My question is if I go for the low rate with the product fee is this tax deductible from the rental income?

    If it is, then it occurred to me that this might be a way to alleviate section 24 tax problems. ie pay product fees rather then interest.

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    S24 doesn’t only include interest, it affects ALL finance costs, so from that point of view there’s no difference between interest and product fees.
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    I THINK his point is that by paying the fee now he gets some tax relief due to the phasing in, as opposed to prob none in 1-2 yrs time on the interest?  perhaps im reading too much into the question...

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    The answer comes down to pure maths

    it is a £1,401 savings by paying the fee

    £170,000 x 1% = £1,700pa x 2years = £3,400

    So £1,999 product fee or £3,400 in xtra interest, I think it's a no brainer.

    Even if you went and got a loan to pay the fee, the repayments over 2 years is likely to be far less than the addditional £141.66pm interest you'd pay with the extra 1%.

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    Of course it depends on whether you use cash accounting or the accruals regime. Under the former the arrangement fee is a finance when you complete. Under the latter it is spread out across the term of what you took out (usually product period) so that it's a constant ROI.
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    Chartered Accountant, Tax Advisor and Mortgage broker

    (and BTL portfolio owner)

    stuart@johnsonsca.com

    02039077022


    You could get tax relief for the mortgage fee of £1999 in the year the product fee was incurred. However, this is subject to the same restrictions as mortgage interest in that it is being phased out and is therefore not a way around section 24.

    That said, in the current year (2019/20) you still have 25% of the mortgage interest being a deductible expense so you would get slightly more tax relief on finance costs this year than from 6th April 2020 which is worth considering if you are in the higher or additional rate of tax.

    Kind regards,

    RITA4Rent

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    RITA4Rent (Rental Income Tax Advisors)

    Specialists in Landlord Taxation

    Recommended tax advisors of the Residential Landlords Association

    Follow us on Twitter @Rita4Rent

    clients (at) rita4rent (dot) co (dot) uk

    http://www.rita4rent.co.uk