HMRC’s New Interest Interpretation… Could Your Remortgage Relief Just Disappear?

TL;DR: HMRC updated its guidance on 4 August 2026 and now says that having enough capital invested in your property business is not, on its own, enough to support interest relief when you refinance. Inspectors are being told to look at what the borrowed money was actually spent on. For landlords releasing equity for personal use, that could put some of the associated mortgage interest relief at risk. The purpose, timing and structure of a refinance now need more thought before the money moves.

 

HMRC has changed its guidance on interest relief where landlords and other business owners replace their own capital with borrowing.

For landlords considering a remortgage or equity release, the change matters.

If you remortgage a rental property and use the money to buy another investment property, there is a clear link between the borrowing and the property business.

Use the same remortgage to fund your own home, school fees, a holiday property or another personal expense, and HMRC may now argue that some or all of the associated interest does not qualify for tax relief.

This creates an odd result. Two landlords could own similar properties, carry the same debt and have taken the same amount of cash out of their portfolio, yet potentially receive different tax treatment because of when they borrowed and what they did with the money.

 

What has HMRC actually changed?

On 4 August 2026, HMRC updated two sections of its Business Income Manual: BIM45700 and BIM45705.

The updated guidance says that simply replacing capital already invested in a business with loan finance does not, on its own, satisfy the tax test for deducting the associated interest.

HMRC says interest is allowable where the borrowing is used for business expenditure or to acquire assets used in the business.

BIM45705 goes further. It tells inspectors that a capital account which is not overdrawn does not, by itself, show that the interest is allowable. They should establish what the borrowed money was actually spent on.

For landlords, a capital account broadly represents the money and accumulated profits you have put into, or left within, the property business.

Historically, more weight was placed on whether the landlord still had sufficient capital invested. The argument was that the landlord was taking back their own money while the borrowing replaced that funding within the business.

HMRC’s revised guidance makes that much harder to rely on by itself.

HMRC has changed its published guidance, not the underlying legislation. The Business Income Manual sets out HMRC’s interpretation of the law and the approach its inspectors are likely to take. It is not legislation, and that interpretation can be challenged.

For the fuller technical background, you can also read the original LinkedIn analysis on HMRC’s new interest interpretation.

 

Why does this matter for portfolio landlords?

Refinancing is a normal part of property investment.

A landlord might buy a property, refurbish it, increase its value and refinance to release some of the capital tied up in the deal.

If that money is then used to buy or improve another property within the same property business, there is an obvious business purpose.

The issue becomes more difficult when the released equity is used personally.

That might mean:

• putting a deposit on your own home;
• paying school fees;
• buying a holiday property;
• funding retirement;
• making another personal investment; or
• simply taking back some of the cash you originally put into the portfolio.

If it was your money in the first place, why should that create a problem?

That is why HMRC’s new interpretation deserves attention.

 

HMRC’s own landlord example shows the problem

HMRC gives an example of a landlord who owns a London property rented to students.

She increases the mortgage and uses the additional funds to buy her own home in Paris.

HMRC’s conclusion is that the extra borrowing funded a private asset, so the interest on that part of the mortgage is not allowable against the property business.

The location makes no difference. Use the money towards your own home in Poole, school fees or another private expense and HMRC could make the same argument.

The difficult question is this: if you originally put your own already-taxed money into a rental property, why should the interest position change because you take some of that capital back several years later?

Under HMRC’s new interpretation, it potentially does.

 

Could paying down debt actually leave you worse off?

Potentially, yes.

Consider a Bournemouth landlord who wants to release £150,000 from a rental property to put towards their own home.

Assume the additional borrowing costs 5.5% a year. Interest on that £150,000 would be £8,250 annually.

If HMRC successfully argues that the borrowing funded private expenditure and therefore does not meet the relevant business-purpose test, that £8,250 would not qualify for residential finance-cost relief.

At the current 20% rate, the maximum illustrative value of the lost tax reduction would be £1,650 a year, assuming the full amount would otherwise have qualified.

From 6 April 2027, the property basic rate is due to rise to 22%. On the same assumptions, the tax reduction on £8,250 would be worth up to £1,815.

The exact tax impact depends on the landlord’s circumstances, but the wider point is harder to ignore.

The landlord put more of their own cash into the property and used less debt. They then refinanced later to get some of that cash back.

HMRC’s interpretation could leave them worse off for having done so.

 

Two landlords, same position, different answer?

Take two landlords buying similar rental properties.

 

Landlord one borrows from day one

The first uses a combination of their own cash and a buy-to-let mortgage.

The mortgage was used to buy the rental property, so the borrowing has an obvious business purpose.

Because they borrowed at the outset, they kept more of their personal cash outside the property. They can later spend that money however they choose without changing what the original mortgage was used for.

 

Landlord two buys with cash

The second landlord uses substantially more of their own money and starts with little or no mortgage.

Several years later, they need £150,000.

Rather than sell the property, they raise a mortgage against it and use the money personally.

HMRC may now take a less favourable view of that interest because the newly borrowed funds can be traced to private expenditure.

Both landlords could end up with:

• a similar rental property;
• £150,000 of mortgage debt; and
• £150,000 having been available for personal use.

Yet the landlord who borrowed from the beginning may have the stronger claim to interest relief.

It is difficult to see the commercial logic in that outcome, but it does show why the history and sequencing of borrowing can matter.

 

Is every remortgage for personal use now caught?

Not necessarily.

Another example in HMRC’s updated guidance makes the position less clear-cut.

A business owner borrows £150,000 against a factory. They spend £75,000 expanding the business and withdraw £75,000 towards a holiday home.

Rather than simply tracing £75,000 to the private purchase, HMRC says the purpose of the borrowing should also be considered, together with amounts that could otherwise have been withdrawn from the business.

So there is more to consider than where the cash eventually lands.

Questions such as these may matter:

• Why was the borrowing taken out?
• How much capital was already in the business?
• What happened to the money?
• Could money have been withdrawn without the new borrowing?

HMRC’s own examples therefore leave some room for judgement rather than producing one completely straightforward rule for every situation.

 

What about Section 24?

For individual residential landlords, there is another layer to this.

Under Section 24, qualifying mortgage interest and other residential finance costs are generally no longer deducted in full when calculating taxable rental profit. Instead, eligible finance costs are used to calculate a basic-rate tax reduction, subject to the relevant limits.

Our guide to Section 24 and mortgage interest relief for landlords explains the wider rules in more detail.

The issue here happens before that calculation.

If HMRC successfully argues that the interest does not qualify as a business finance cost in the first place, that interest does not enter the Section 24 calculation.

On the affected borrowing, the relief could therefore disappear altogether rather than simply being restricted.

 

What should landlords do before remortgaging?

There is no suggestion that landlords should stop refinancing. The point is to understand what the refinance is doing before it completes.

 

Be clear about where the money is going

Borrowing to acquire another rental property is very different from borrowing to fund a personal purchase.

Where the new borrowing is clearly being used within the property business, the tax position is easier to support.

 

Think about sequencing

The order in which you retain profits, repay borrowing, introduce capital, refinance and withdraw money could affect the tax treatment.

Two routes can leave you in almost exactly the same financial position and still potentially produce different answers.

That is why this needs to be considered before the refinance completes, not once the money has already been spent.

 

Keep evidence of why you borrowed

If HMRC asks questions several years later, a clear record of what happened will help.

Keep evidence of why the borrowing was taken out, what it was intended to fund, where the money went and how the transaction fitted into the wider property business.

Your mortgage application may also be relevant, particularly where the lender recorded the reason for releasing additional capital.

 

Do not automatically amend historic returns

If you remortgaged previously and used some of the proceeds personally, HMRC’s new guidance does not automatically mean your past tax treatment was wrong.

The facts need to be reviewed first.

Look at why the borrowing was taken out, the capital position at the time, where the money went and how the interest has been treated before deciding whether any action is needed.

 

Does this make incorporation more attractive?

Potentially, but this issue should never drive the decision on its own.

BIM45700 and BIM45705 apply for Income Tax purposes. Companies operate under different corporation tax and loan relationship rules.

That does not make a limited company an automatic solution.

Moving an existing portfolio into a company can involve Capital Gains Tax, Stamp Duty Land Tax, refinancing costs and other commercial considerations. Taking money out of the company personally can create separate tax consequences too.

Whether incorporation works depends on the wider picture, including:

• your personal tax rate;
• the size and value of the portfolio;
• your level of gearing;
• whether you need the rental profits personally;
• future acquisition plans; and
• your longer-term succession plans.

Two landlords with very similar portfolios can still arrive at different answers.

A structure that did not make sense a few years ago may be worth reconsidering if the tax rules, portfolio or landlord’s personal circumstances have changed.

IWN’s property tax specialists can look at those variables together rather than treating incorporation as a simple yes-or-no decision.

 

Is HMRC’s interpretation settled law?

No.

HMRC’s manuals tell us how the department thinks the legislation should be applied. That matters because it shows the position an inspector is likely to take, but the manuals are not legislation.

There is also some tension between HMRC’s own examples.

One puts significant weight on tracing the borrowed money to private expenditure. Another tells inspectors to consider purpose and amounts that could otherwise have been withdrawn from the business.

Landlords do not need to panic over the change, but they do need to take it seriously. If you are releasing equity, the reason for the borrowing, where the money is going and how the transaction is structured all deserve more thought than they may have done previously.

 

Frequently asked questions

Does this affect landlords who own property through a limited company?

Not under these specific Income Tax rules.

Companies are subject to a different corporation tax regime. However, borrowing through a company and then taking the money out personally can create separate tax consequences, so a limited company should not be viewed as a simple workaround.

I remortgaged several years ago and used the money for a house deposit. Should I amend my tax return?

Not automatically.

The first step is to establish why the borrowing was taken out, what happened to the money and how the interest was treated. Take advice before changing a previously submitted return.

Can I still get tax relief if I remortgage to buy another rental property?

Potentially, yes.

Where the additional borrowing is clearly used to acquire an asset for the property business, the position is much easier to support under HMRC’s guidance.

My capital account is in credit. Does that mean the interest qualifies?

Not on that basis alone, according to HMRC’s updated guidance.

HMRC now wants inspectors to look at what the borrowed money was actually used for.

Is money released through a remortgage taxable income?

No.

Releasing equity through a remortgage does not itself create rental income. The issue is whether the interest charged on that borrowing qualifies for tax relief.

 

Planning to release equity from your property portfolio?

If you are planning to refinance a rental property and take money out of the portfolio, look at the tax position before the borrowing completes.

Once the mortgage has completed and the money has been spent, your options may be much more limited.

IWN works with landlords and property investors on refinancing, portfolio structure and wider property tax planning. We can look at what you are trying to achieve, run through the options and help you understand the tax consequences before you commit.

If you are considering a remortgage or equity release, contact IWN Accountancy to discuss your plans with the team.

 

This article is for general information only and reflects UK tax legislation and HMRC guidance available at the time of writing. HMRC manuals contain HMRC’s interpretation of the law and are not themselves legislation. Tax treatment depends on individual circumstances, so professional advice should be taken before acting.