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 Updates Guidance on Interest Deductions and Capital Withdrawals
HMRC amended several pages of its Business Income Manual on 1 July 2026, affecting guidance on interest deductions, replacement of capital with borrowing, and withdrawals from unincorporated businesses. The changes impact BIM45690 (“Funding the business”) and BIM45700 (“Withdrawal of capital from a business”), which are relevant to the computation of trading profits and property income for individual landlords and property partnerships.
According to HMRC’s published update record, the amendments to BIM45690 and BIM45700 were made to provide “clearer context for the examples and remove unnecessary numerical calculations.”
Previous Guidance
Before the July 2026 amendment, BIM45700 stated that a proprietor could withdraw profits and capital from a business and replace them with interest-bearing loans, with the interest being an allowable deduction. This was based on the principle that the borrowing provided working capital for the business, as long as the proprietor had not withdrawn more than the accumulated profits and capital credited to them. This guidance was particularly relevant to landlords who might refinance a property business after initially funding it with personal capital.
Revised Guidance
The revised BIM45700 now states that while a proprietor may withdraw profits and capital and replace them with borrowing, “simply exchanging existing capital for loan finance does not on its own satisfy the wholly and exclusively test provided by S34.” Interest is now only deductible where the borrowing is used for business expenditure or the acquisition of assets used in the business.
A new example in BIM45690 clarifies this change: if a proprietor borrows to facilitate the withdrawal of capital and then uses the withdrawn money for a private purpose, such as a holiday, HMRC concludes that the interest is not deductible because the borrowing was for a personal withdrawal.
These changes are directly relevant to UK letting agents and inventory clerks working with landlords and property partnerships, as they affect the deductibility of interest on loans used to replace withdrawn capital.
Source: Property118