Redemption fees on buy to let

Redemption fees on buy to let

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Client changes mortgages in order to raise more funds to buy further properties, and is charged a redemption fee on each property of approx £3000, as this is done to release further funds for more property investment would it be allowable? I suspect that it isn't but just wanted to check.
jem

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By RupertChalk
27th Oct 2006 14:19

Probably yes
Although S58 ITTOIA 05 is headed up "Incidental Costs of Obtaining Finance", subsection 2 talks of "obtaining the finance, providing security for it or repaying it." So your client should get relief for the £3,000 to enable him to repay the loan. However, have a look at subsection 4c to make sure your client does not fall foul of these provisions.

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By AnonymousUser
25th Oct 2006 13:30

unfortunately not!!
Whilst you are allowed associated costs of obtaining loan finance ( and therefore allowed administration and other fees connected with obtaining a loan) you are not allowed costs relating to the repayment of a loan which has been obtained at a discount and I assume that the redemption fee applies because you are still within the lock in period relating to having obtained a loan at a beneficial rate - that is how i read Section 77 TA 1988 anyway.

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By miangraham
27th Oct 2006 15:11

Yes it is
A lender contracts to lend money at a specific level of interest for a specific period of time. The interest is governed, in part, by the lender's interest cost and required margin. When a borrower breaks the contract, by agreement, he has altered the lender's business model in a negative manner. Consequently the lender recovers the interest he is not now earning on the returned funds, by making an interest charge more appropriate to the use to which the funds were actually put (overdraft/bridge).
This additional interest charge has become known as a redemption fee because it is a cost incurred upon redemption, but as an interest cost it is fully deductible.
Only if there was a flat rate per property or per loan could it be regarded as being correctly called a fee, and even then if you consider it's purpose, see above, it is still capable of being regarded as an interest charge.

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