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 Rewrites Guidance on Landlord Refinancing and Interest Relief

HMRC has replaced its long-standing guidance on how landlords can refinance rental properties and claim interest relief, according to a report by Property118. The change could have significant implications for landlords, accountants, tax advisers, and professional indemnity insurers.

For years, HMRC’s Business Income Manual included a detailed example showing how a landlord could refinance a rental property, withdraw capital, and still claim interest relief on the replacement borrowing. This example was widely used by accountants and tax advisers when advising clients, and was also referenced by the government’s former Office of Tax Simplification in its review of residential property income.

HMRC has now removed this example and replaced it with a new one involving a similar transaction, but with a different outcome. In the new guidance, a landlord who refinances a London rental property and uses the released funds to buy a private home is told that the interest is not allowable. HMRC has also removed the numerical calculations that previously demonstrated whether a proprietor was withdrawing capital genuinely standing to their credit, describing them as “unnecessary numerical calculations.”

If HMRC applies this new interpretation to past transactions, landlords could face unexpected tax demands. Accountants and tax advisers may also face allegations of negligence for advice that was previously based on HMRC’s own published example. This could lead to professional indemnity insurers being asked to fund the cost of investigating and resisting such claims.

The previous guidance, as preserved in an earlier version of HMRC’s manual, included a worked example involving a landlord who refinanced a property and withdrew funds to buy a private home. HMRC’s earlier conclusion was that the interest on the mortgage loan was allowable in full, provided the borrowing did not exceed the value of the business asset or the capital standing to the proprietor’s credit. This approach was also cited by the Office of Tax Simplification as long-standing HMRC guidance.

Letting agents and inventory clerks should be aware of these changes, as they may affect landlords’ tax positions and the advice given by professional advisers.