Early redemption penalties (\u201cERP\u201d) can be deductible against the rental profits. Section 272B(5)(c) IITOIA 2005 allows a deduction for:\n\n\n\ninterest, amounts economically equivalent to interest, andthe incidental costs of finance.\n\n\n\nHMRC manual BIM45820 confirms that they accept that an ERP falls into the final definition of an \u201cincidental cost of finance\u201d so relief for the penalty amount will be allowed. \n\n\n\nAs\nit is eligible for relief under s272B, the interest relief restriction in s272A\nITTOIA 2005 (introduced by F(No2)A 2015) will equally apply to the ERP.\n\n\n\nThe effect of this section is that for tax years starting after 6 April 2017, relief for the payment of the ERP, by way of a deduction against rental income is denied and instead relief is given by way of a 20% income tax \u2018reducer\u2019. \n\n\n\nThe\namount of relief available is calculated as 20% of the lower of:\n\n\n\nThe total\nfinance costs incurred,The profits of\nthe rental businessThe total\ntaxable property income (after personal allowances). \n\n\n\nWhere the ERP is paid in full, it clearly falls under the sections above and would be allowed as a cost in the year of payment.\n\n\n\nIf however, the ERP was \u2018rolled up\u2019 into a new borrowing, payment of the amount would be spread across the life of the mortgage.\n\n\n\nIf you have any questions, please contact the advice line on 0116 243 7892 quoting your QACC reference number.