A long post but this is vital to anyone who invests in their own name and is remortgaging their property (the buy, renovate, refinance model).

HMRC altered guidance to deny interest relief

HMRC has apparently changed its stance regarding remortgaged let property, denying interest relief on the additional borrowings where the capital is withdrawn.

Historical position

Individual clients with property lettings businesses often ask “can I remortgage the let properties and extract the money for my own use?” For many years the answer to this query has been: “yes”, as deductions for a lettings business are treated just like deductions for any other business.

From 6 April 2017, where the let property is residential, the deductions for interest and finance charges are subject to a 25% restriction, but that rule is not relevant to this story.

The property owner can remortgage and extract capital from their lettings business as long as their capital account doesn’t become overdrawn. All the mortgage interest, include the extra payable on the additional loan, is eligible to be deducted from the rental income.

If the owner extracts no more than the capital he introduced to the business (the value of the properties when first let), there is no effect on the tax position. The fact that a greater proportion of the capital in the business is now supported by a mortgage, is irrelevant.

This position is clearly set out in the HMRC Business Income Manual at para BIM45700, which includes the example of Mr A who acquired a flat for £125,000 with a mortgage of £80,000. He lets it when it is valued at £375,000 and remortgages so the total debt is £205,000, and extracts £125,000 of capital to spend on a private asset. The HMRC example concludes:

“Although he has withdrawn capital from the business, the interest on the mortgage loan is allowable in full because it is funding the transfer of the property to the business at its open market value at the time the business started. The capital account is not overdrawn.”

Amended guidance

If your client falls squarely in the position of Mr A in the HMRC manual, you would not expect HMRC to challenge the deduction of interest. However, this is what happened to a client of one West Midlands firm.

The HMRC officer who enquired into their client’s tax return insisted that the additional mortgage should be used to provide working capital for the business, and not be extracted to use for private purposes. The officer was not looking at the helpful example in para BIM47500, but instead referred to guidance on gov.uk: https://www.gov.uk/…/income-tax-when-you-rent-out-a-propert…, under the heading “increasing your mortgage”, where it says:

“If you increase your mortgage loan on your buy-to-let property you may be able to treat the interest on the additional loan as a revenue expense, so long as the additional loan is wholly and exclusively for the purpose of the letting business”

A similar passage is included on this gov.uk page: https://www.gov.uk/…/income-tax-when-you-rent-out-a-propert…, under expenses wholly and exclusively incurred.

These passages impose the wholly and exclusively rule on the mortgage interest deduction as set out in ITTOIA 2003, s 34, but totally ignore the original capital introduced to the business argument. What’s more, this gov.uk guidance was altered in the course of the enquiry into the taxpayer’s affairs.

Legitimate expectations

The accountancy firm hit back with Business Brief 60/09 in which HMRC state:

“We will normally be bound by our previous guidance where the taxpayer can demonstrate that he or she reasonably acted in reliance on the previous guidance, and would suffer detriment from the correct application of the statute.”

Their client had relied on the HMRC guidance in the Business Income Manual para BIM47500, which had been in place for at least 12 years.

HMRC doesn’t back down

The accountancy firm gently suggested to HMRC that changing their online guidance in the course of the tax enquiry was an abuse of power, and if they did not allow the guidance in para BIM47500 to apply, they would consider taking the point to judicial review.

HMRC are still not backing down. The tax advisers involved in this case, said: “HMRC have not seen sense and we are currently awaiting a date for an FTT hearing.”


HMRC’s manuals are not the law; the guidance they contain is merely guidance which can and will be ignored by the courts if it does not agree with the tax law. However, if you are relying on a section of HMRC guidance to defend a client’s tax position, always print a dated copy of the page, as it can be changed without notice.

Check when the relevant section of the HMRC manual was last updated. All the recent updates should be listed on a separate page for each manual – click on: ”See all updates” in the header banner of the particular manual.

The gov.uk pages are even less reliable than the HMRC manuals. The guidance there has often been simplified to suit the gov.uk publishing guidelines so often misses vital points of detail.

If in doubt read the tax law, not the HMRC manuals.

An excellent article by © Rebecca Cave

Email us on mark@property-tax-advice.co.uk if you need our support.