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Where Taxpayers and Advisers Meet

Three ways to account for mortgage arrangement fees: Which one is correct?

KarenFa
Posts:11
Joined:Tue Jan 22, 2013 3:46 pm
Three ways to account for mortgage arrangement fees: Which one is correct?

Postby KarenFa » Wed Feb 07, 2018 12:01 am

Hi all,

The mortgage arrangement fees can be and usually is added to the mortgage balance, but is of course still an expense. How is it properly accounted for in the self-assessment? I have seen people add the whole amount for the year the mortgage/remortgage was taken out, thus adding a large sum to the finance cost for that year and going substantially down the next. The second approach I've heard of is to take the arrangement fee and divide it across the number of fixed years that the mortgage extends over (so, for example, divide the mortgage arrangement fee over five years if a five year fix). The final approach, I've read about (I think on this very forum), is to divide it over the full term of the mortgage (say, 20 years), but I'm not sure what would happen in case of a remortgage in a few years time, if this approach is taken (the full arrangement fee would never appear to be used up as finance cost)?

someone
Posts:691
Joined:Mon Feb 13, 2017 10:09 am

Re: Three ways to account for mortgage arrangement fees: Which one is correct?

Postby someone » Wed Feb 07, 2018 8:30 pm

I don't know the detailed answer to your question but yes, if it's added to the loan then you shouldn't deduct the whole amount as an expense in the first year.

I believe that if you pay it directly rather than add it to the loan then you do deduct it all in the first year.

I guess it makes sense as, presumably you'll be claiming tax relief on the interest charged if you add it to the loan but you obviously cannot if you don't as there is no interest charged.

Which would also imply that you continue to account for the fees over the lifetime of the loan, even if you remortgage in the future. I guess at some point it becomes cheaper to stop claiming rather than waste ink writing out the calculations ;-)

djbolton
Posts:7
Joined:Wed Feb 07, 2018 3:05 pm

Re: Three ways to account for mortgage arrangement fees: Which one is correct?

Postby djbolton » Thu Feb 08, 2018 12:30 am

To my mind, you pay upfront fees to get a cheaper interest rate over the initial fixed term period. So that's the term to amortize the fees over, both in your profit calculations and your tax return. I can't see how HMRC could argue against that.

sandy2000
Posts:38
Joined:Wed Aug 06, 2008 3:33 pm

Re: Three ways to account for mortgage arrangement fees: Which one is correct?

Postby sandy2000 » Fri Feb 16, 2018 2:54 pm

The fee charged is an expense when it is incurred..
When it is added to the loan then effectively it has been paid by the borrower, albeit with another loan .. Just like any business expense paid using a loan.
I can't see the justification to mandate it to spread over any length of time - since the lender is not taking the fee in instalments - fee has been taken upfront.

sandy2000
Posts:38
Joined:Wed Aug 06, 2008 3:33 pm

Re: Three ways to account for mortgage arrangement fees: Which one is correct?

Postby sandy2000 » Fri Feb 16, 2018 3:03 pm

I guess it makes sense as, presumably you'll be claiming tax relief on the interest charged if you add it to the loan but you obviously cannot if you don't as there is no interest charged.
Didn't quite understand this bit...
This would imply that it if interest (on the extra loan to cover the fee) is claimed as an expense then the full Fee cannot be claimed as an expense ...
SO if someone paid for "non capital allowable repairs " using a loan then the cost of repairs need to be spread over a number of years it will take to repay that loan since the interest on that loan would also be an allowable expense?

bd6759
Posts:4262
Joined:Sat Feb 01, 2014 3:26 pm

Re: Three ways to account for mortgage arrangement fees: Which one is correct?

Postby bd6759 » Fri Feb 16, 2018 8:07 pm

For individulas it is covered by s58 ITTOIA - incidental cost of loan fiance.

For companies, the treatment is different - it may fall within NTLR.

However, the overarching principles of GAAP may require a significant arrangment fee to the amortised over the period.

sandy2000
Posts:38
Joined:Wed Aug 06, 2008 3:33 pm

Re: Three ways to account for mortgage arrangement fees: Which one is correct?

Postby sandy2000 » Fri Feb 16, 2018 9:27 pm

However, the overarching principles of GAAP may require a significant arrangment fee to the amortised over the period.
Agreed.. Thanks for confirming.
"significant" could imply significant in relation to the annual interest charge, for example?
However, most often the fees are around 1% to 2% of the loan so there would not be a need for a blanket treatment of amortisation to all fees.

Regards.

bd6759
Posts:4262
Joined:Sat Feb 01, 2014 3:26 pm

Re: Three ways to account for mortgage arrangement fees: Which one is correct?

Postby bd6759 » Sat Feb 17, 2018 11:01 am

"significant" could imply significant
Significant implies not immaterial.

sandy2000
Posts:38
Joined:Wed Aug 06, 2008 3:33 pm

Re: Three ways to account for mortgage arrangement fees: Which one is correct?

Postby sandy2000 » Mon Feb 19, 2018 2:57 pm

"significant" could imply significant
Significant implies not immaterial.
Thanks .. i think "significant" has to be in relation to size of the loan and other costs of the loan - e.g £2000 fee on £20k loan is significant where is it is not so on a £200,000 loan

.. this is what i came across on
http://www.fyldetaxaccountants.co.uk/property-articles/are-lender-arrangement-fees-tax-deductible-for-landlords/

Profits of a business – any business, including a property rental business – must be calculated using GAAP. This isn’t optional, however, for a small property rental business the FRSSE (Financial Reporting Standard for Smaller Entities) should also be applied.
The FRSSE states, at paragraph 12.4:
“Where an arrangement fee is such as to represent a significant additional cost of finance when compared with the interest payable over the life of the instrument, the treatment set out in paragraph 12.2 [similar to FRS 4] shall be followed. Where this is not the case it shall be charged in the profit and loss account immediately it is incurred.”
In the circumstances of a typical Buy to Let mortgage, an arrangement fee is not ‘significant’ compared to the interest payable over the life of the mortgage. Therefore, the correct accounting treatment under FRSSE for arrangement fee is to include the fee in the rental accounts when incurred, and in full.


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