HMRC Changes Rules on Mortgage Interest?

HMRC appears to have changed its long held views on the availability of tax relief on interest charged on new borrowings by property business owners who re-mortgage their property to withdraw capital from their business. 

If this is a genuine change it may well impact on thousands of buy-to-let owners.

It is unclear whether this is a policy change or an accidental error during the re-write of their Property Income manual (PIM) following the April 2017 Restrictions on Mortgage Interest Relief.

HMRC’s Old PIM guidance

HMRC’s previous PIM guidance to landlords who wish to re-mortgage their letting property was as follows:

You purchased a buy-to-let property for £120,000 with a mortgage of £90,000 and let it to a tenant straight away.

Three years later the property is valued at £150,000 and you increase your mortgage on the property to £115,000. All of the interest on the mortgage can still be claimed as a revenue expense as the loan doesn’t exceed the initial £120,000 value of the property when it was introduced to your letting business.

NB – If you increased the mortgage to £125,000, the interest payable on the additional £5,000 is not tax deductible and cannot be claimed as a revenue expense.  

HMRC’s New PIM guidance (it is unclear when this was changed)

If you increase your mortgage loan on your buy-to-let property you may be able to treat interest on the additional loan as a revenue expense, as long as the additional loan is wholly and exclusively for the purposes of the letting business.

Interest on any additional borrowing above the capital value of the property when it was brought into your letting business isn’t tax deductible, as before.

Therefore, in our example, the additional interest charged on the increased borrowing of £25,000 would now only be tax deductible if the funds from the new loan are used wholly and exclusively for the purposes of the letting business, not if there is simply a withdrawal of capital.