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CT treatment of mortgage arrangement fee

Does corporation tax follow the FRS102 effective interest rate where there are arrangement fees?

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Hi all,

I have a client who has remortgaged an investment property that his company owns. Accounting under FRS102.1a. They remortgaged and was charged a £2k arrangement fee which was added to the loan (interest only).

I've done the whole effective interest. I've done the whole effective interest rate calculation for the accounting, but now, thinking about the corporation tax I'm not sure what the treatment of the mortgage interest would be. There are a few scenarios that I could think of

  1. Tax follows the accounting treatment as a trading cost
  2. Tax follows the accounting treatment but as a non-trading loan relationship (don't think it would be this one)
  3. The whole bank fee is treated as a taxable cost, and the interest is adjusted accordingly to be non-amortised interest rate.

There may be other options. I'm happy to do the reading and research but would really appreciate a nudge in the right direction. It hasn't come up for me before and I'm struggling to cut throught he vast swathes of HMRC handbooks etc.

Thanks in advance

Replies (14)

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By The Dullard
19th Nov 2019 12:49

Tax treatment follows accounting treatment. Essentially, tax law confirms that it is a deductible expense, and the accounting treatment determines the timing of the deduction.

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Replying to The Dullard:
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By Kylo Ren
19th Nov 2019 12:57

Perfect - that you so much for the quick response.

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Psycho
By Wilson Philips
19th Nov 2019 13:03

Another vote for option 2.

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Hallerud at Easter
By DJKL
19th Nov 2019 13:05

Key is surely what the loan is used for, if for the property letting business then I would go NTLR route with the costs, if monies applied to a trading part of operations then deduct costs to arrive at trading profit.

I used to have to worry about these sorts of things when we were both a developer and a property investment company (hybrid) but now we are pure property investment life is a lot simpler.

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Replying to DJKL:
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By Tax Dragon
19th Nov 2019 14:22

Purpose, yes, but I think the nuance here is that what's tested is the purpose of the company being a party to a loan relationship. So the additional borrowing may be for a trade purpose, but the underlying relationship isn't.

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Replying to Tax Dragon:
Hallerud at Easter
By DJKL
19th Nov 2019 14:31

Sorry-I am likely being dim here, but surely what asset secures the borrowing is academic and what is key is the use of the released funds, if funds are used to say buy trading stock then the interest (and the arrangement fee) are trading expenses and do not fall into NTLR debits. Or am I being thick? (quite possible- this is a shortage of sleep day)

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Replying to DJKL:
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By Tax Dragon
19th Nov 2019 14:58

Agree - but I'd say "loan" where you say "released funds". If [yes, if] the loan (relationship) is non-trading, I think the released funds are treated the same way.

If the whole lot is trading (which may be inferred from the OP's comment 1, but - as Wilson notes, it's hardly conclusive), then the whole lot is trading.

Unless I'm missing an apportionment rule...

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Replying to Tax Dragon:
Psycho
By Wilson Philips
19th Nov 2019 14:36

I agree - another instance of me not reading the question properly (although in my defence the question makes no mention of trading activities, other than the possibility of option 1 applying, from which one might infer that there are trading activities). The underlying asset is of little relevance, it is the purpose of the borrowing that matters.

So my vote is now for option 1 or option 2.

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By Duhamel
19th Nov 2019 13:27

Option 2

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By Kylo Ren
19th Nov 2019 15:31

Thank you all for your replies so far! Sorry I should have been more specific.
The company is an SPV holding only one residential property let on a 3rd party commercial basis. There are no other activities.
Does that change anyone's thoughts on it?

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Replying to Kylo Ren:
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By The Dullard
19th Nov 2019 15:34

So, there's no trade? That would appear to rule out option 1, and option 3 is long gone.

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Replying to Kylo Ren:
Hallerud at Easter
By DJKL
19th Nov 2019 15:43

I now vote 2.

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Replying to DJKL:
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By Tax Dragon
19th Nov 2019 15:45

It's hardly a vote any more.

This turn of events has me shaking my head in disbelief.

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Replying to DJKL:
Psycho
By Wilson Philips
19th Nov 2019 15:46

And I revert to my original option.

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