Tax deduction for legal fees on abortive purchase?

[malm]

Hello,

I have incurred significant legal fees with an aborted BTL property purchase.

How are such costs treated for tax purposes ? Are they allowable ? Should I be declaring them as part of the property expenses section on my tax return to be offset against my rental income or is there an alternative ?

Thanks & rgds.. Malm

[jeffrey]

But they're not costs incurred in actually acquiring this property, are they, as you did not buy it and will therefore have no income from it.
Tax experts: doesn't that make a difference?

[malm]

I have 2 other BTL properties where I do have small surplus of income over expenses. I had hoped I would be able to take a consolidated view of all costs and income associated with my BTL activity ?

Rgds Malm

[Telometer]

You can indeed take a consolidated view of all costs and income associated with your BTL business.

Unfortunately...

... acquiring a property is associated with acquiring an investment, and has nothing to do with your BTL business (save for, of course, the fact that the property is the venue where your BTL happens). So sadly these abortive costs are not a cost of your BTL business.

[malm]

Thats a very useful insight Telometer. Thanks for clarifying the position.

Rgds Malm

[Phlash]

The case might be different if you say tried to arrange finance on a property, for which you incurred costs, but the finance fell through due to the valuation. You then rearranged to buy it another way. The asset is subsequently bought and although the initial costs were 'abortive' the whole transaction still occured, and claiming the initial finance costs in full would be allowable.

The fact pattern always needs to be examined carefully.

[Always Problems]

But they're not costs incurred in actually acquiring this property, are they, as you did not buy it and will therefore have no income from it.
Tax experts: doesn't that make a difference?

But surely if you are in the business of "Buy to let" and during the course of acquiring another property the deal does not go ahead any expenditure would be "Tax Deductable"

[Phlash]

But surely if you are in the business of "Buy to let" and during the course of acquiring another property the deal does not go ahead any expenditure would be "Tax Deductable"

You miss the point.

You must separate the business and the business' assets used to carry out the business.

Profit is made from the letting of property, associated costs with the actual letting of property can be deducted. That is why lettings profit is taxed as income and gains in the property against CGT, because the asset itself and associated costs thereon are not directly linked to the lettings income, it's merely an asset used in the course of the business to generate the income.

Specifically, arranging finance on a new property is tax deductible against income (albeit it must be amortised over the life of the loan), only once you have bought the property and use it for business purposes, ie you let it and get an income.

If you incur costs, but never purchase a property, you can never generate an income with said property - because it is not yours. In the same way that it will not produce income, it will not 'produce' expenses either.

So, that shows no income tax deduction. What about CGT deduction? Well, there will be none, because you can't sell and make a gain on a property you don't own.

These costs therefore, are tax neutral, they are simply costs.

[Telometer]

Specifically, arranging finance on a new property is tax deductible against income (albeit it must be amortised over the life of the loan), only once you have bought the property and use it for business purposes, ie you let it and get an income.

It is worth noting that the costs of arranging financing are capital, and are deductible only because the legislation says so.

[Phlash]

It is worth noting that the costs of arranging financing are capital, and are deductible only because the legislation says so.

Yes, agree. Worth clarifying.

[property mongrel]

Does that apply to an aborted purchase, would the costs of arranging the finance be deductible even though the purchase does not complete?

I understand travel costs and legal costs are not.

pm

[Phlash]

Does that apply to an aborted purchase, would the costs of arranging the finance be deductible even though the purchase does not complete?

I understand travel costs and legal costs are not.

pm

I think you missed this statement in my post about the deductibility of loan arrangement fees:

"only once you have bought the property and use it for business purposes, ie you let it and get an income."

[property mongrel]

Thank you for your patience, I did miss your perfectly clear point, reading what I wanted to see perhaps.

pm

[Telometer]

"only once you have bought the property and use it for business purposes, ie you let it and get an income."

I think this bears slight clarification. If you already have a BTL and hence ongoing property business income, then buy another BTL then the costs are deductible against your property business income even if the new property is a dog and you never manage to let it and so sell it again after a year of trying to let it.

[Phlash]

True - I did start typing another post to stretch this example - but then stopped, thinking I'd confuse things.

As in most cases, it's about understanding the fact pattern, on which a tax treatment can be determined.

[Always Problems]

I think this bears slight clarification. If you already have a BTL and hence ongoing property business income, then buy another BTL then the costs are deductible against your property business income even if the new property is a dog and you never manage to let it and so sell it again after a year of trying to let it.

Absolutely. This is exactly what I mean, and of course once perhaps you have your first BTL, any expenditure incurred whilst looking for or buying your second BTL is deductable and can be offset against your rental income from the first one. Infact should you have to pay for surveys or finance fees this should be paid out of the rental income from the first BTL. I personally would have a seperate bank account for BTL and run everything through that.

[Phlash]

Absolutely. This is exactly what I mean, and of course once perhaps you have your first BTL, any expenditure incurred whilst looking for or buying your second BTL is deductable and can be offset against your rental income from the first one. Infact should you have to pay for surveys or finance fees this should be paid out of the rental income from the first BTL. I personally would have a seperate bank account for BTL and run everything through that.

You'v misinterpreted the point telometer was making. I'll explain why when I'm not using a handset and I'm at a pc.

[Telometer]

To always problems: NO!!!!!!!

Absolutely not.

No expenditure in finding your second BTL may be offset against your rental income as this expenditure is all capital. It may therefore either be offset against the profits on disposal of that property, OR if no property is purchased then it is never available to be offset.

Where the costs are related to arranging loan finance, then the situation is different.