Can You Claim Tax Relief on a Re-Mortgaged BTL Property?

Can You Claim Tax Relief for Interest on a Re-Mortgaged BTL Property If You Use the Money for Something Other Than Your Rental Property Business?

A recent update to HMRC guidance means landlords need to think twice before remortgaging a rental property to raise personal funds.

It is a common question among landlords: you bought your rental property some years ago, it has increased in value, or perhaps it is completely mortgage-free, and you would now like to release some of that equity for a personal purpose—perhaps to buy a car, help a family member, or fund home improvements. Because the property is mortgage-free or has built up substantial equity, it may seem like an obvious source of funds. But can you also claim tax relief on the mortgage interest against your rental income? The answer has recently become considerably less straightforward.

The basic rule

Tax relief for mortgage interest on a rental property depends on what the borrowed money is actually used for, not on what the loan is secured against. This is known as the “wholly and exclusively” rule. For the interest to qualify for relief, the loan itself must be for the purposes of the rental business. A loan used to buy a car, for example, is private expenditure, and on the face of it falls outside this rule, even though the loan happens to be secured against a rental property.

The traditional view: withdrawing your own capital

For many years, HMRC’s own published guidance recognised an important exception. If you had originally put your own money into a property, you were treated as having a “capital account” in your rental business equal to that investment. If you later took out a mortgage up to the value of that original capital, HMRC’s long-standing position was that you were simply replacing your own money with borrowed money, and the interest remained deductible, even if you then used the funds for something personal.

For a landlord who bought a property outright some years ago and has seen it grow in value, this meant a new mortgage raised up to the original purchase price would generally qualify for relief, regardless of what the funds were then used for.

What has changed

On 1 July 2026, HMRC substantially rewrote its guidance on this point, specifically the manual pages dealing with funding a business and the withdrawal of capital. The revised wording is far more restrictive. HMRC now says that simply exchanging your own capital for a loan does not, on its own, satisfy the wholly and exclusively test, and that interest is only allowable where the borrowed funds are used for business expenditure.

This is a significant shift in HMRC’s stated position, and it has proved controversial. Advisers have publicly questioned what has actually changed in the underlying law, since the relevant legislation has not been amended, only HMRC’s interpretation of it. Therefore this remains a genuinely unsettled and closely watched area of tax practice.

What this means in practice

Take a straightforward example. A landlord bought a rental property outright some years ago, using cash, with no mortgage. The property has since increased in value, and the landlord wants to raise a new mortgage secured against it to fund a personal purchase, such as a car.

• Under the older, long-standing HMRC approach, this would likely have qualified for interest relief, provided the new borrowing stayed within the value of the capital originally invested.
• Under HMRC’s current published guidance, the position is much less certain. Because the funds are being used for a personal purchase rather than the rental business, HMRC would be expected to challenge the deduction.
• If the interest were accepted, relief for a residential letting property is, in any event, restricted to a basic rate tax reducer of 20 per cent under the finance cost rules, rather than a full deduction from rental income.

What landlords should do now

• Do not assume that a mortgage secured against a mortgage-free rental property will automatically qualify for interest relief if the funds are used for a personal purpose.
• Keep clear records of the original purchase price, the capital introduced into the letting business, and what any new borrowing is actually used for.
• If you are planning to remortgage to release funds for a personal purpose, speak to us before you proceed, so we can assess the current risk and the options available.
• If you have an existing claim of this type, do not assume it needs to be unwound, but do let us review it in light of this guidance update.

A developing area

This is a live and closely followed issue in the property tax world, and it may well be revisited by HMRC, challenged at tribunal, or clarified further in the coming months. We are monitoring developments closely and will update clients as the position becomes clearer.

If you are considering remortgaging a rental property, whether to release funds for a personal purpose or to reinvest in your portfolio, please get in touch with us before you proceed. We would be happy to talk through your specific circumstances and the options available to you.

Thandi Nicholls Ltd
Creative Industries Centre
Glaisher Drive
Wolverhampton
West Midlands
WV10 9TG