Arrangement, broker and valuation fees on a property loan: what they are worth, and to whom
Every new property loan brings a cluster of fees: the lender's arrangement fee, a broker's fee, the valuation, the legal work on the security. They are easy to lump in with the purchase and easy to misfile. For tax they are costs of finance, and the relief they attract depends on who borrows, what the loan is for, and which basis the accounts are prepared on. Here are five mistakes that turn up most often, and the arithmetic of getting them right.
What counts as a cost of finance
For an individual landlord, section 58 of the Income Tax (Trading and Other Income) Act 2005, applied to property businesses by section 272, allows the incidental costs of obtaining loan finance where the interest on the loan would itself be deductible. The section describes them as fees, commissions, advertising, printing and other incidental matters incurred wholly and exclusively for obtaining the finance, providing security for it or repaying it. HMRC's Business Income Manual gives a list that fits a property loan closely: legal and professional fees for negotiating the loan and preparing the documents, brokerage and introduction fees, Land Registry fees, search fees and valuer's fees incurred in connection with the security, commitment fees, fees for guaranteeing a loan, and the costs of rolling over, extending or replacing an existing loan. Stamp duty, foreign exchange losses and premiums on repayment are excluded. For a company the equivalent rules are in the loan relationship code of the Corporation Tax Act 2009, and HMRC's Corporate Finance Manual gives arrangement fees and fees for a loan guarantee as examples of expenses incurred in bringing a loan into existence.
Mistake one: adding the fees to the cost of the property
Because the valuation, the lender's fee and the solicitor's invoice for the mortgage all arrive with the purchase, they are often added to the property's cost in the accounts and then ignored. That loses them twice. They are not deductible as costs of acquisition for capital gains tax, because HMRC's Capital Gains Manual says that fees of building societies, solicitors and valuers and any other costs of arranging a mortgage or other loan in connection with acquiring an asset are not allowable expenditure. And while they sit in the property's cost, they are not being claimed where they belong, as costs of finance against rental income. The purchase and the loan need separate columns from the completion statement onwards.
Mistake two: claiming a residential loan's fees in full
For an individual letting residential property, the restriction on finance costs reaches the fees as well as the interest. Section 272B defines the costs of a dwelling-related loan to include the incidental costs of obtaining finance by means of the loan, and HMRC's Property Income Manual confirms that fees and commission for obtaining a loan are within the restriction. They are not deducted from rental profit at all. They go into the pool of finance costs relieved by a tax reduction at the basic rate, 20 per cent for 2026/27 and 22 per cent from 2027/28 under the Finance Act 2026, subject to the usual limits. For commercial lettings there is no such restriction, and the fees are a full deduction. Where one loan funds both, the costs are apportioned on a just and reasonable basis. Companies are not affected by the restriction.
Mistake three: deducting everything in the year the loan is taken
Where accounts are prepared on the accruals basis in line with generally accepted accounting practice, the fees of taking out a loan are spread over its expected life as part of its effective cost, rather than charged in one year. HMRC's Business Income Manual states that where the treatment complies with that practice, a computational adjustment to deduct all the costs in the year the finance is obtained is not permitted. For a company, the loan relationship rules follow the accounts in the same way. A landlord on the cash basis, which since 2017/18 has been the default for many individual landlords with property receipts of GBP 150,000 or less, takes costs into account when they are paid, so the timing depends on the basis the business actually uses. When a loan is repaid early and replaced, whatever has not yet been relieved on the old loan normally comes through in the year it is repaid.
Mistake four: forgetting the fees on a loan that never completed
Fees paid for a loan that falls through are not wasted for tax. Section 58 allows the costs where they were incurred for the purpose of obtaining finance, whether or not the finance is actually obtained. For companies, section 329 of the Corporation Tax Act 2009 brings in expenses incurred before a company becomes a party to a loan, including where it never does. An abandoned application, with its valuation and legal fees, belongs in the accounts as a finance cost of the year, not written off against nothing.
Mistake five: assuming there is VAT to recover
A lender's fee for granting credit and a broker's fee for genuinely acting as an intermediary in arranging it are generally exempt from VAT, so there is usually no VAT on them to recover. A valuer's fee is different. Valuation is not a financial service, so it will normally carry VAT at the standard rate, and that VAT can be recovered only by a VAT-registered business to the extent it relates to taxable supplies, such as rent on a commercial building that has been opted to tax. For a residential landlord, whose rents are exempt, it is simply part of the cost.
The same fees, three owners
Illustrative figures only, not anyone's affairs. A loan of GBP 400,000 on a five year fixed rate carries a lender's arrangement fee of GBP 3,000, a broker's fee of GBP 1,000, a valuation of GBP 600 and legal fees on the security of GBP 900, a total of GBP 5,500. Each set of accounts is on the accruals basis, the loan runs its full term and it is taken out at the start of the 2026/27 tax year, so GBP 1,100 is relieved each year for five years. The property rates are legislated for 2027/28 only, so the later years assume they continue. Borrowed by a higher-rate individual against let houses, the fees fall within the finance cost restriction: relief is GBP 220 in the first year at 20 per cent and GBP 242 a year for the next four at 22 per cent, GBP 1,188 in all. Borrowed by the same individual against a let shop, the fees are deducted from rental profit, at 40 per cent in the first year and 42 per cent after that, GBP 2,288 in all. Borrowed by a company paying the 25 per cent main rate, the relief is GBP 1,375. The same GBP 5,500 is worth almost twice as much to one owner as to another, and the difference is the tax treatment of the loan, not the size of the fee.
What to check on the next completion statement
Has every fee connected with the loan been separated from the cost of the property? Is each loan identified as residential, commercial or mixed, with an apportionment recorded where it funds both? Do the accounts spread the fees over the loan's life, or, on the cash basis, claim them when paid, and has the treatment been applied consistently? Have fees on a loan that was repaid early been released in that year? Were any applications abandoned in the year, and have their costs been claimed? And has any VAT been claimed on fees that were exempt, or missed on a valuation for an opted building? These are small amounts on each loan, and they recur on every refinancing for the life of a portfolio.
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This article is general information only and does not constitute tax advice. Figures and dates are current as at the date of writing; any worked example is illustrative. Always consult a qualified adviser before acting.