A backdoor restriction on buy-to-let interest relief?

Buy-to-let investors beware. HMRC have retrospectively changed their guidance which has led to enormous uncertainty.

If you are a buy-to-let landlord you probably bought your property using a combination of your own capital and a mortgage. Ever since, you have received some tax relief on the interest you pay on the loan.

In the past if owners increased that mortgage to take their initial investment back from the business it was believed that HMRC allowed them to set the additional interest against their rental income irrespective of how the cash was used.

However, HMRC have recently amended their guidance to ‘clarify’ this was never their view.


James purchased a property for £150,000 using £100,000 mortgage and £50,000 cash. The mortgage interest on the £100,000 was set against the rental income for tax purposes. Some years later James needed £25,000 to buy a new car. As this amount did not exceed the original value of the property when it was first let, and the capital account was not overdrawn, under the old guidance interest on the £25,000 would be deductible against the rental income. Under the revised guidance, the additional loan of £25,000 for a new car is not considered by HMRC to be ‘for a qualifying purpose’ and they believe that the interest on the £25,000 is not tax deductible.

Going forward

A recent High Court case discussed the circumstances where HMRC arbitrarily change their guidance and the Court ruled that a taxpayer could not rely on the legality of the guidance. It will be interesting to see how this latest change of view will be received by the courts and whether HMRC will be looking at historic positions. Care is needed when structuring finance for buy-tolet properties to ensure maximum relief is granted.

If you have any further questions please email pem@pem.co.uk


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