Could refinancing your property put mortgage interest relief at risk?

In a statement published on 7 October, the CIOT explained that HMRC's changes to its Business Income Manual in July 2026 appear to restrict the circumstances in which interest on borrowing can be deducted when calculating taxable business profits. Previously, HMRC accepted that business owners could withdraw capital they had introduced into a business and replace it with borrowing, with the interest remaining deductible provided certain conditions were satisfied. This was particularly relevant to landlords who refinanced rental properties to release capital for personal use.

However, HMRC's revised guidance at BIM45700 states that simply replacing existing capital with borrowed funds does not automatically satisfy the requirement that expenditure must be incurred wholly and exclusively for business purposes. The guidance includes an example of a landlord who increases the mortgage on a London rental property and uses the additional borrowing to purchase a private residence in Paris. HMRC concludes that the interest on the additional borrowing is not deductible because the money was used to acquire a private asset. This represents a significant departure from an example previously included in HMRC's guidance, where interest on borrowing used to release capital from a rental property was accepted as deductible, even though the money released was used to purchase a private residence.

The CIOT has asked HMRC to clarify whether the revised guidance represents a change in practice and, importantly, what this means for taxpayers who have already submitted returns relying on the previous guidance. The underlying legislation has not changed, and HMRC's interpretation is not necessarily the final word on how the law should be applied. Nevertheless, the revised guidance creates uncertainty for businesses that have used borrowing to replace capital previously invested. Landlords and other unincorporated business owners who have refinanced assets and withdrawn capital should review their borrowing arrangements, particularly where the money released was used for personal expenditure. They should retain evidence of the original capital introduced, subsequent withdrawals and the purpose of any borrowing.

Until HMRC clarifies its position, anyone considering a similar refinancing arrangement should take advice before proceeding. Those who have already claimed interest relief under the previous guidance should also review their position, although they should not assume that their earlier tax returns are necessarily incorrect.