Is Mortgage Interest Tax Deductible After HMRC’s Rewrite?

On 1 July this year, HMRC quietly rewrote the part of its Business Income Manual that most landlords and sole traders rely on for remortgage interest tax relief. There was no consultation and no announcement. HMRC says nothing of substance has changed. Most of the advisers I speak to think otherwise, and since Forbes Dawson called it “a seismic shift” on 6 November, the row has spilt well beyond the professional press.

The pages are BIM45690 and BIM45700. They deal with interest on money borrowed by people who run a business or a letting business in their own name, rather than through a company. That’s a lot of people. HMRC’s own figures show 2.88 million unincorporated landlords declared rental income in 2024 to 2025, and 1.15 million of them claimed residential finance costs, worth £12.82 billion between them.

Although it pains me to say so, I’ll say at the outset that I have some sympathy with HMRC here. But I don’t think the manual settles the question, and anyone who has refinanced should understand why.

What the guidance used to say

For years BIM45700 told HMRC’s own staff that a proprietor “may withdraw the profits of the business and the capital they have introduced to the business, even though subsequent funding may then have to be provided by interest-bearing loans.” It went on: “The interest payable on the loans is an allowable deduction.” The thinking was that the new loan simply replaced capital the owner was always entitled to take back, so it was funding the business.

There was a property example too. A landlord remortgaged a London flat that he let as part of his business and used the money to buy a home abroad. Because his capital account stayed in credit, HMRC allowed the interest in full.

What it says now

The first of those sentences survives. The second has gone. In its place HMRC now says that “simply exchanging existing capital for loan finance does not on its own satisfy the wholly and exclusively test”, and that the interest is deductible “where the borrowing is used for business expenditure or acquisition of assets used in the business.”

The new example is Mrs H. She lets a London house to students, takes a job in Paris and increases the mortgage on the London house to buy her new home there. HMRC now says the interest isn’t deductible, because the money bought a private asset. Put Mrs H next to the old example, and I find it hard to accept this is only a clarification.

Does HMRC have a point?

Yes, and it’s worth saying so plainly. Under the old wording, a landlord who’d put, say, £750,000 of their own money into a property could later remortgage, take, say, £250,000 out, spend it on a supercar and still claim relief on the interest. The car is for personal use and never goes near the business. The law asks whether the interest is incurred wholly and exclusively for the purposes of the business, and that’s a hard test to pass with a Ferrari on the drive. If anyone loses out from this change, it may be the Ferrari dealers.

But HMRC’s manuals aren’t law.

They’re HMRC’s view of the law, written for its own officers. The test is still section 34 of the Income Tax (Trading and Other Income) Act 2005, which applies to property businesses through section 272, and how it applies to borrowing is a matter for the tribunals and the courts.

The old approach wasn’t something HMRC made up as a favour, either. It reflected a view about what borrowing is really for, and HMRC’s own manual still points its officers to Silk v Fletcher, the Special Commissioners’ decision on capital accounts and interest.

Does it matter that I remortgaged before July?

HMRC hasn’t said. In an open letter on 18 July, Property118 asked whether the new view applies only to new borrowing, to interest arising after July on older borrowing, or to every open year. HMRC replied on 28 July that it doesn’t generally respond individually on policy or guidance.

People who arranged their finances relying on the published guidance will feel hard done by, and I understand why. I’d still be wary of assuming that reliance alone will protect a claim. Holding HMRC to its own guidance is difficult. The statement has to be clear and unqualified; you have to have told HMRC everything relevant, and the route is usually judicial review rather than an ordinary appeal.
That’s a high bar. What will help is the facts.

What makes a claim stronger

If you’ve refinanced and you claim the interest, look hard at the money. How much capital did you actually put in, and when? Has your capital account stayed in credit once you strip out revaluations? Is the borrowing more than the property was worth when it came into the business? And what did the money actually pay for?

Someone who took back capital they’d introduced and kept it as a reserve, or spent part of it on the letting business, is in a very different position from someone who bought a car the week the funds arrived. Records made at the time are worth far more than an explanation pieced together during an enquiry.

Section 24 landlords and companies

Residential landlords might think this doesn’t touch them, because since April 2020 they’ve had a basic rate tax reduction for finance costs rather than a deduction. It does. The reduction is only given for costs that would have been deductible if the restriction didn’t exist, so the same test decides whether the interest counts at all. I’ve written about how the section 24 restriction works.

Companies are outside it. HMRC’s guidance says this chapter doesn’t apply to corporation tax, where the loan relationship rules apply instead. That isn’t a reason to incorporate in a hurry. Moving a portfolio into a company can trigger capital gains tax and usually stamp duty land tax on the market value, and those bills can easily dwarf the interest at stake. SDLT planning has to come first.

Filing this year’s return

Some advisers suggest following the old guidance and explaining that in the white space on the return. Whichever way you go, I think disclosure is sensible. If you set out what you’ve claimed and why, it’s much harder for HMRC to say later that it couldn’t have known, and it’s good evidence that you took reasonable care, which matters if a penalty is ever on the table. Saying nothing and hoping is the worst of both worlds, as I’ve explained in my piece on how far back HMRC can go.

If HMRC opens an enquiry

An enquiry into an interest claim usually starts with questions about the capital account and where the money went. If you can’t agree, HMRC issues a closure notice amending your return, and you then have 30 days to appeal. You can ask for an internal review, try HMRC’s alternative dispute resolution or mediation, or take the appeal to the First-tier Tribunal. The tribunal decides what the law is. It isn’t bound by HMRC’s manual.

I suspect this point will reach the tribunal before long. When it does, I’d expect the argument to turn on what the borrowing was really for, not on which version of the manual was in force when the remortgage completed.

Where that leaves you

HMRC has a fair point about borrowing that ends up in a supercar. It has changed what it says, though, not the law, and it still hasn’t said how it will treat people who relied on the old wording. If you’ve refinanced, get your figures together now, decide with your adviser how to file, and take advice before you concede anything if HMRC writes.

If HMRC has questioned your interest claim, or you’re working out how to file, you can instruct me directly without going through a solicitor or accountant, and I often work alongside clients’ own advisers. You can get in touch here, and you’ll find more on how I handle HMRC disputes.