Broadly speaking, taxable profits of a rental business are worked out in the same way and using the same principles as taxable profits of a trading business. In particular, the incidental costs of loan finance are normally fully deductible (this is of course changing from April 2017 for residential buy-to-lets – see here – but that is not what this note is about).
So where, for example, a property is refinanced you can expect to deduct against rental income all the costs of refinancing including legal fees, arrangement fees and the cost of any valuation required by the lender. Importantly, this remains the case even if, as sometimes happens, some or all of these costs are added to the loan and repaid with the capital sum over the term of the loan.
In many cases, the accounts prepared for a rental business are limited to a profit and loss account: unlike most trading businesses, an annual balance sheet is not prepared. One consequence of this may be that the only figures which are given to the accountant in relation to a loan and included in the accounts may be the actual payments made to the lender: other movements on the loan account (including any expenses which are added to the capital amount of a loan) may be overlooked. By the time the matter comes to light (if at all) – perhaps on sale of the property – it may be too late to claim relief for the expenses in question.
So, be careful when considering rental expenses – check that you have taken account not only of costs which you have paid out: remember also to take account of costs which have been added to borrowings.
For more on property taxation, please get in touch with your usual BKL contact or use our enquiry form.