Property purchase costs - when are they tax deductible?
When you buy a property you’ll incur legal and other professional costs. Usually these are only tax deductible when you come to sell the property (they reduce your capital gain). However, if the property is used in your business is there a way you can deduct any of these costs from your profits?
Tax deductible costs
How you categorise an expense can affect whether you get immediate tax relief or tax relief at some future date or no tax relief at all. Property purchases are no exception to this. In fact, property purchase costs offer many difficulties for property investors in deciding how to categorise purchase costs for tax purposes. The purpose of this article is to help you decide how to categorise these costs and thereby maximise your tax deductions.
Most of the the costs of purchasing property count as part of the property’s purchase price. The Taxman calls these costs capital expenses. Tax deductions on these costs are only given as part of the capital gains tax calculation when you sell the property. That usually means a very long wait for tax relief. The good news is that not all property purchase costs are treated that way.
Capital or revenue expense
Costs you can deduct for income and corporation tax purposes from your business profits are called revenue expenses. Those you can't are called capital expenses. So, are there any property purchase costs which could fall in the category of "revenue"? You'll be pleased to know that when it comes to the incidental costs of raising finance, I think there is.
Those familiar with this blog will know that I'm a great fan of us all becoming acquainted with tax law (it acts as both a shield and a sword against the Taxman). And this is what it says about the incidental costs of raising finance:-
(1) In calculating the profits of a trade, a deduction is allowed for incidental costs of obtaining finance by means of :—
- a loan, or
- the issue of loan stock,
if the interest on the loan or stock is deductible in calculating the profits of the trade.
(2) “Incidental costs of obtaining finance” means expenses—
- which are incurred on fees, commissions, advertising, printing and other incidental matters, and
- which are incurred wholly and exclusively for the purpose of obtaining the finance, providing security for it or repaying it.
(3) Expenses incurred wholly and exclusively for the purpose of :—
- obtaining finance, or
- providing security for it,
are incidental costs of obtaining the finance even if it is not in fact obtained.
Translating that into plain English, this means that you can treat the incidental costs of obtaining a loan or the security on a loan, (i.e. a mortgage) as a revenue expense (i.e. deductible from profits). The legislation says these include fees, commissions, advertising, printing and other incidental matters. What's more, use the following tips to claim even more expenses as revenue:-
Tax Tip 1:- Loan fees, including special arrangement fees for mortgage deals, can be claimed in full against your profits as revenue expenses.
Tax Tip 2:- Even if the finance doesn’t go through you can still claim the costs as revenue expenses.
Over what period can you claim the tax deduction?
Generally, revenue expenses can be deducted from your profits in the financial year you incur them. The bad news is that the accountancy rules say that property purchase costs, and the corresponding tax deduction, might need to be spread over more than one year.
Example:- If you pay a loan arrangement fee for a three-year fixed interest deal, your accountant should insist that the expense is divided equally between three years’ accounts.
Tax Tip 3:- If your accountant does take this line, but you are classified as a small company (click here for the limits), remind them of the special rules applicable to small companies in the Financial Reporting Standard for Small Entities, which states:-
"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 (i.e. spread over the life of the loan) shall be followed. Where this is not the case it shall be charged in the profit and loss account immediately it is incurred."
Again, this needs to be translated into understandable English. In essence what it is saying is that any cost relating to raising finance can be written off in full immediately provided it is insignificant compared to the amount of interest payable.
Other hidden costs
Other property purchase costs can be overlooked (i.e. energy bills and standing charges paid in advance by the seller). Also, banks sometimes use your solicitor to carry out legal work relating to their loan offer. These costs will usually be included as part of your solicitor’s final bill.
Tax Tip 4:- Analyse your solicitor’s completion statement carefully. Pick out any costs solely related to securing the loan or mortgage. Add on any costs associated with accrued bills for light, heat and claim them as property purchase costs too.
Tax Tip 5:- Letting a property counts as a business for income and corporation tax purposes. If you incur costs relating to buying a rental property, these can also be deducted from your rental income. This is even the case where they were incurred before you started to receive rent.
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