Is a BTL early redemption fee (ERC) an allowable deduction in Box 44 ? BIM45820 says so.

BIM45820 states that incidental loan costs and residential property Finance costs will attract relief. I am NOT looking to claim the early redemption fee against Capital Gains or Rental Income, but want to set the ERC against 20% relief for finance costs. I have read extensively across the self assessment help pages and manuals and found the following statements that state that fees and break payments attract the 20% Tax relief on residential property income - Finance costs restricted: Other costs affected are: - fees and any other incidental costs for getting or repaying mortgages and loans - ie. fees to repay a mortgage (which is what an ERC is) - BIM45820 The majority of break payments that take the form of a penalty for early redemption of the loan will represent genuine compensation to the lender. In such circumstances the break payment will not amount to a premium and will therefore attract relief as incidental costs of raising loan finance - Box 44 says put the amount of any costs, interest and alternative finance payments in box 44. (ie. finance payments) Please would you confirm that I can include the ERC in Box 44.

Hi,
 

Thank you for your question - An early redemption Fee is not an allowable expenses for either Capital Gains or Rental Income . Guidance is shown at : BIM45820 - Specific deductions - incidental costs of loan finance: exclusions from relief    and Capital Gains Manual  . Thank you .

Hi ,
 

Thank you for your question - An early redemption Fee is not an allowable expenses for either Capital Gains or Rental Income . Guidance is shown at : WWW.GOV.UK/HMRC-INTERNAL-MANUALS/BUSINESS-INCOME-MANUAL/BIM45820 and Capital Gains Manual   . Thank you .

Hi HMRC 17. I'm still unclear from your response as I've looked again at BIM45820 and it explicitly states that an early redemption is not a premium, but is in fact an incidental cost of raising finance, which will therefore attached relief. BIM45820 states - The majority of break payments that take the form of a penalty for early redemption of the loan will represent genuine compensation to the lender. In such circumstances the break payment will not amount to a premium and will therefore attract relief as incidental costs of raising loan finance. Most High Street lenders commonly require such break payments as a condition of advancing finance. However there is no intention at the outset for a premium to be paid, that more capital is repaid than originally advanced. Instead any break fee received is compensatory. Consequently, why is this not applicable to be included in Box 44 as a finance cost, given that BIM45820 states it is an incidental cost and not a premium? Many thanks

Hi
BIM45820 - Specific deductions - incidental costs of loan finance: exclusions from relief - HMRC internal manual - Premiums and break charges states 'Some loans include terms under which the interest charged is at a lower annual rate in the early years of the term and increases later. 
A borrower who wishes to repay early will have to pay the lender a charge (called break charges in this guidance). 
Whether break charges are incidental costs of obtaining loan finance will depend on the facts of the particular arrangement. 
If such charges amount to a premium, they are expressly disallowed. 
Then under ‘What is the nature of the break payment’ states 'The majority of break payments that take the form of a penalty for early redemption of the loan will represent genuine compensation to the lender. 
In such circumstances the break payment will not amount to a premium and will therefore attract relief as incidental costs of raising loan finance. If the circumstances of your early redemption charges fall into this second category and don't amount to a premium then they would be an allowable expense.
Thank you

Hi I am investigating this same question and had found the same explanation in BIM45820, which seems clear that if the break charge is compensation to the lender, rather than a premium, then its an allowable expense. Admin here have said its not an allowable expense, yet have cut and pasted the same text from the manual that says that in the majority of cases it is? Could we have some clarity on how to tell the difference between compensation and a premium? That would be very helpful. Thank you

Hi ,
 

Thank you for your question.  This forum is for general income from property questions only.  HMRC cannot decide this for you. Please refer back to BIM45820, specifically under the heading ‘What is the nature of the break payment’ . Thank you .