Why Capitalise Loan Fees
Arrangement fees, due diligence or other costs attached to business loans are not always tax deductible in the year that they were charged.
That is because if the costs are significant and represent a significant proportion of the expected interest payable, HMRC will expect them to be capitalised and amortised.
That will mean turning the total value of the cost into an "intangible asset" followed by charging that in equal amounts against taxable profit over the lifetime of the loan. The annual amortisation charge is then deductible from taxable profit.
How Amortisation of Fees Works
For example, take an five-year loan subject to an arrangement fee of £7,000 plus accountancy costs of £2,000 and legal fees of £1,000. This £10,000 total will be shown in the balance sheet as an intangible asset to be amortised (i.e.) written down against profits at the rate of £2,000 annually over five years.
Note that amortisation chargeable over the next twelve months is classified as a current liability. The balance is classified as a long term liability.
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| Intangible B/Fwd | 10,000 | 8,000 | 6,000 | 4,000 | 2,000 |
| Charged to Profit | 2,000 | 2,000 | 2,000 | 2,000 | 2,000 |
| Intangible C/Fwd | 8,000 | 6,000 | 4,000 | 2,000 | 0 |
| Current Liability | 2,000 | 2,000 | 2,000 | 2,000 | 0 |
| Long Term Liability | 6,000 | 4,000 | 2,000 | 0 | 0 |
Forecasting and Planning with Figurewizard
To view how Figurewizard creates forecasts profit & loss; balance sheets, liquidity and cash flow forecasts simply using your predicted figures for sales, margins, overheads and so, follow the links below,
All sample forecasts are live working examples. Follow to link below to the What-If calculator and planner to interact with them.
Am I right to assume that if a loan is paid off early the remaining fees not yet amortised would become deductible in full?
Yes.