Mortgage Interest Tax Relief

[Friston]

In the tax year 2004/5 I was paying 5.09% interest on a Mortgage which I can set against Income on property I am letting. This was a tracker rate from Abbey whose standard variable rate (SVR) was 6.75% at the time.

In May 2005 I switched to a new mortgage provider and had to pay Abbey a redemption penalty of £1371 which was essentially the difference I would have paid had I been on the SVR rather than the tracker. This covered the period Oct 2004 to May 26th 2005.
Can I pro-rata this penalty for the tax year 2004/5 - as it is mortgage interest after all - and set it against income- even though I didn't actually pay it in that tax year- I paid it out in May 2005?
Many thanks

[Tax Accountant]

In the tax year 2004/5 I was paying 5.09% interest on a Mortgage which I can set against Income on property I am letting. This was a tracker rate from Abbey whose standard variable rate (SVR) was 6.75% at the time.

In May 2005 I switched to a new mortgage provider and had to pay Abbey a redemption penalty of £1371 which was essentially the difference I would have paid had I been on the SVR rather than the tracker. This covered the period Oct 2004 to May 26th 2005.
Can I pro-rata this penalty for the tax year 2004/5 - as it is mortgage interest after all - and set it against income- even though I didn't actually pay it in that tax year- I paid it out in May 2005?
Many thanks

The answer depends on the small print of the penalty clause in the mortgage document. You need to see the exact description, and calculation, of the charge.

In the absence of any further information, I would be inclined to say that the whole of the charge is appropriate for the tax year 2005-06, ie the year in which it was levied.

Having said this, there are quite often no hard and fast rules about these things as far as the tax is concerned, so long as you get there. I don't think that anyone is going to male a song and dance whichever method you choose. After all, under self assessment, rental income is classed as a business and is generally taxed under the rules applicable to businesses. In particular, all income and expenses is to be claimed in the year to which it relates as opposed to ther year in which it is received or paid. Therefore, for example, if insurance is paid for year to 30 September, strictly speaking you have to claim half in one year and half in the other year. The most important thing is to be consistant in your treatment year after year.

If it makes you feel comfortable, you could always explain your treatment in the 'additional information' box of your tax return so that the taxman has a choice whether to accept your treatment or to challenge it.

I would not lose any sleep either way.

Ramnik