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HMRC Updates Guidance on Mortgage Interest for Withdrawn Capital

HMRC has amended its Business Income Manual, changing guidance on the tax treatment of mortgage interest when landlords withdraw their own capital from property businesses. The changes affect unincorporated property businesses and partnerships, but not companies.

On 1 July 2026, HMRC updated several pages of its Business Income Manual, including BIM45690 (“Funding the business”) and BIM45700 (“Withdrawal of capital from a business”). These updates apply to trades and property businesses operated by individuals and partnerships. Companies are not directly affected, as they are subject to separate corporation tax loan relationship rules.

According to HMRC, the amendments were made to provide clearer context for examples and to remove unnecessary numerical calculations. However, the new wording in BIM45700 states: “Simply exchanging existing capital for loan finance does not on its own satisfy the wholly and exclusively test.”

HMRC’s revised guidance now states that interest is allowable where borrowing is used for business expenditure or to acquire assets used in the business. An example in the updated BIM45690 describes a business owner who uses personal funds to acquire business assets, then later borrows the same amount and withdraws her original capital, spending it on a private holiday. HMRC concludes that the interest is not allowable because the borrowing facilitated a personal withdrawal.

This change is relevant for letting agents and inventory clerks who work with landlords and property businesses, as it may affect how mortgage interest is treated for tax purposes when capital is withdrawn and used for non-business purposes.