Editor's note: This brief was summarised by The Property AI Newsroom from a report by Property118. Read the original article for full details.

HMRC Guidance Rewrite Raises Concerns Over Taxed Profits for Landlords

HMRC’s recent rewrite of guidance BIM45690 and BIM45700 has raised concerns that landlords could face tax complications on profits they have already paid tax on. The changes may affect how landlords refinance their property businesses and withdraw capital, particularly when those funds have been retained in the business for years.

The updated guidance initially appeared to address whether landlords could refinance their property businesses, withdraw capital, and continue to claim tax relief on interest when the withdrawn money is used for personal purposes. However, the implications may be broader. According to the report, a landlord’s positive capital account can include accumulated profits that have already been taxed, not just the original cash invested. These retained profits may have been used for mortgage repayments, property improvements, working capital, or further acquisitions, but tax was already paid on them as they arose.

The revised HMRC guidance now appears to allow for the possibility that landlords could be penalised if they withdraw these already-taxed profits and replace them with commercial borrowing. This issue is particularly significant for landlords considering incorporation. Professional commentary cited in the report advises that landlords should generally draw down substantial positive capital accounts before incorporating, as otherwise the value may become locked into company shares and potentially subject to further tax charges when extracted.

The report highlights that landlords are taxed on profits as they arise, not on the amounts withdrawn from the business. For example, in a property partnership, partners are taxed on the full taxable profit allocated to them, regardless of how much is withdrawn for personal use. Retained profits left in the business are not untaxed; they have already been subject to Income Tax.

These developments are relevant for UK letting agents and inventory clerks who work with landlords considering refinancing or incorporation. The changes may affect how landlords manage their business finances and plan for future tax liabilities.