Landlord News & Consultancy

HMRC has replaced long-standing guidance that accountants and tax advisers may have relied upon when advising landlords about refinancing and withdrawing capital. If HMRC now applies its revised interpretation to historic transactions, landlords could face unexpected tax demands, advisers could face negligence allegations and the professional indemnity market may be left funding the resulting disputes.

For years, HMRC’s Business Income Manual contained a detailed worked example showing how a landlord could refinance a rental property, withdraw part of the capital previously invested in the business and use that money privately without automatically losing relief for the interest on the replacement borrowing. The example was numerical, easy to follow and sufficiently important to be reproduced by the government’s former Office of Tax Simplification in its official review of residential property income. It was therefore not unreasonable for accountants and tax advisers to regard it as a meaningful statement of HMRC’s interpretation when advising clients whose property businesses had been financed with a mixture of personal capital, reinvested profits and external borrowing.

HMRC has now removed that example and replaced it with another involving a strikingly similar transaction, but this time the answer is reversed. A landlord again refinances a London rental property and uses the money released to buy a private home, yet HMRC now says the interest is not allowable. The calculations that previously showed whether the proprietor was withdrawing capital genuinely standing to their credit have disappeared, with HMRC describing them as “unnecessary numerical calculations”. If this new approach is applied to refinancing completed while the former guidance was still published, the consequences will not stop with the landlords concerned. Accountants and tax advisers may have to defend advice that was properly grounded in HMRC’s own worked example, while their professional indemnity insurers may be asked to fund the cost of investigating and resisting claims that would never have arisen had HMRC explained clearly what changed and when.

The guidance advisers were entitled to take seriously

In the previous version of BIM45700 preserved by the Wayback Machine, HMRC gave the example of Mr A, who owned a flat in central London worth £375,000 subject to a mortgage of £80,000. When the property was introduced into his rental business, the remaining £295,000 represented capital introduced by him. Mr A later increased the mortgage by £125,000 and withdrew that money to buy a private home in Rotterdam. His total borrowing then stood at £205,000, while his capital account remained £170,000 in credit. HMRC’s conclusion was unequivocal: “The interest on the mortgage loan is allowable in full.” The figures mattered because they demonstrated that Mr A had not borrowed beyond the value represented by the business asset or withdrawn more than the capital standing to his credit. An external lender had simply replaced part of the finance that Mr A had previously supplied himself.

The private use of the money withdrawn did not, in HMRC’s published analysis, convert the mortgage into private borrowing because the commercial purpose and effect of the refinancing had to be considered in the context of the continuing rental business and the proprietor’s capital account. This was not an interpretation devised by a promoter seeking to exploit an obscure ambiguity. The former Office of Tax Simplification reproduced the example in its official 2022 Property Income Review, describing it as long-standing HMRC guidance and explaining that HMRC appeared to accept interest relief where borrowing enabled a proprietor to withdraw capital without creating an overdrawn capital account. Professional advice should never rest solely on an HMRC manual because guidance is not legislation, but where HMRC publishes a detailed numerical example for years and that interpretation is then repeated in an official government report, advisers are plainly entitled to treat it as highly relevant evidence of HMRC’s view.

The near-identical example that now produces the opposite answer

HMRC’s Business Income Manual update record confirms that BIM45700 was amended on 1 July 2026. The current version of BIM45700 now contains an example involving Mrs H, who owns a London house let to students, moves to Paris for work, increases the mortgage secured against the rental property and uses the additional money to buy her new private residence. HMRC’s conclusion is that “the interest on the new remortgage is not an allowable deduction” because the additional borrowing funded a private asset. The resemblance to the former Rotterdam example is obvious, but the new version gives no figures for the value of the London property, the original mortgage, the capital introduced by Mrs H, the amount remaining to her credit or whether the refinancing exceeded the capital represented within the business.

Those omissions make it impossible to determine whether Mrs H was borrowing additional money for a private purchase or merely recovering part of the capital she had already invested in the continuing rental business. HMRC says the July amendments were intended to provide clearer context and remove “unnecessary numerical calculations”, yet the missing calculations were the very mechanism by which taxpayers and advisers could distinguish between replacing business capital and financing additional private expenditure. The present manual still acknowledges that proprietors may withdraw profits and capital even where interest-bearing replacement finance is required, and its third example says officers should consider both the proprietor’s purpose in obtaining the finance and the amounts that could have been withdrawn without the borrowing. That appears to recognise that the capital available for withdrawal remains relevant, while the new Paris example denies relief without disclosing any of the information needed to apply that analysis.

The law is more nuanced than simply following the cash

The statutory starting point is the wholly and exclusively test in section 34 of the Income Tax (Trading and Other Income) Act 2005. HMRC’s own continuing guidance at BIM45665, referring to Scorer v Olin Energy Systems Ltd, recognises that the purpose of borrowing cannot necessarily be determined solely by tracing where the money went on the day it was received. Purpose is a question of fact to be assessed from all the available evidence, which is particularly important where the proprietor has already used personal money or retained profits to finance a continuing business asset and subsequently replaces part of that finance with commercial borrowing.

Suppose a landlord purchases and improves a rental property using £300,000 of mortgage borrowing and £200,000 of personal savings. Several years later, the landlord increases the mortgage from £300,000 to £400,000 and withdraws £100,000, leaving another £100,000 of the original personal capital invested in the business. The property remains in the rental business, the landlord has not withdrawn more than was previously introduced and a commercial lender has simply replaced part of the finance the landlord supplied at the outset. The landlord might use the returned capital to repay personal borrowing, provide for retirement, assist a family member or take a very expensive holiday, but those later choices do not necessarily answer the commercial question of what the mortgage is financing. The former BIM45700 treated the capital account and the continuing business asset as central to that analysis, whereas the replacement example appears capable of treating the destination of the withdrawn money as decisive without showing whether the proprietor was merely recovering capital genuinely standing to their credit.

The same issue extends beyond original seed capital. A landlord may pay tax on rental profits and then leave those profits within the business to reduce mortgages, fund improvements, acquire further properties or provide working capital. Those profits do not cease to belong economically to the landlord merely because they were retained rather than immediately withdrawn. Years later, refinancing may be necessary to restore access to that money for retirement, succession planning, family support, personal debt reduction or incorporation. If HMRC’s revised position means that relief depends primarily upon how the returned money is subsequently spent, personally supplied capital and already-taxed profits could effectively become trapped inside the business as the price of preserving interest relief. That would be a significant commercial restriction and deserves a clear legal explanation, not the unexplained substitution of Rotterdam with Paris.

When a landlord’s tax enquiry becomes an adviser’s PI notification

Consider an accountant advising a landlord in September 2023. The landlord has invested £500,000 of personal capital and retained profits within a property business and wants to refinance £200,000 of that investment. The accountant reviews the balance sheet and capital account, considers the legislation, reads HMRC’s worked Rotterdam example and records that the client’s capital account will remain substantially in credit after the withdrawal. The refinancing is completed, the money is spent and the transaction cannot later be unwound without potentially significant cost. If HMRC subsequently opens an enquiry, applies the replacement guidance and seeks additional tax and interest, the landlord may ask why the accountant did not warn that HMRC could regard the borrowing as private. The accountant may have a compelling answer because the advice was based upon the law, the client’s records, HMRC’s own numerical example and the interpretation reproduced by the OTS, but a credible defence does not prevent a complaint or claim from being made.

Once a claim is alleged, the dispute may require a detailed review of the adviser’s retainer, the precise advice given, the version of HMRC’s manual available at the time, the treatment of the capital account, the client’s understanding, whether any additional warning ought reasonably to have been given, whether the client would have acted differently and what loss was actually caused. Even a weak professional negligence allegation can generate substantial investigation and defence costs, particularly where similar claims arise across different firms and each insurer appoints its own legal team to examine the same unresolved question. The professional indemnity exposure is therefore not based on an assertion that advisers who relied on the former guidance were negligent. It arises because HMRC’s unexplained rewrite may create the conditions in which landlords allege that they were.

Why today’s insurer may inherit yesterday’s advice

Professional indemnity insurance is commonly written on a claims-made basis, so subject to the policy wording and any retroactive date, a policy in force when the claim is made may respond to professional work completed years earlier. Hiscox explains the distinction and confirms that a valid claim made during a current policy period can relate to work performed in an earlier year. Advice given while the former BIM45700 remained published may therefore produce a notification under a policy written by a different insurer several years later, which makes this relevant not only to claims teams but also to underwriting, renewal questionnaires, reserving and the pricing of tax advisory risks.

The potentially insured professional population is substantial. ICAEW requires practising members in public practice to maintain professional indemnity insurance, while the Association of Taxation Technicians imposes a similar requirement on self-employed members and identifies the TaxPro arrangement provided by Hiscox through Gallagher. Marsh Commercial describes itself as ICAEW’s exclusive appointed insurance broker and says it manages more than 4,300 policies for ICAEW members, while Hiscox’s own accountants’ cover expressly contemplates claims arising from tax-related professional errors and the costs of defending them. None of this proves that a wave of claims will follow, but it does explain why the PI market should examine the issue before HMRC’s treatment of historic refinancing becomes embedded in enquiries and appeals.

HMRC was asked to explain and chose not to

Property118 published an open letter asking what had changed in the law behind BIM45690 and BIM45700. We asked why the replacement Paris example appeared to produce the opposite answer from the former Rotterdam example, whether capital account balances remained relevant, what legislation or judicial authority supported the revised position and how HMRC intended to treat historic refinancing completed in reliance upon its former published guidance. We also asked whether the amendments represented a new interpretation for future borrowing, a correction HMRC intended to apply to open tax periods, or merely a clarification that should not alter the outcome where borrowing genuinely replaces capital standing to the proprietor’s credit.

We subsequently published a second open letter asking HMRC to clarify its 20-hour guidance for landlord incorporation relief. That letter concerned HMRC’s statement at CG65715 that incorporation relief should be accepted where an individual personally spends 20 hours or more each week undertaking activities indicative of a business, even though section 162 of the Taxation of Chargeable Gains Act 1992 contains no statutory hours threshold and the figure arose from the facts of Ramsay v HMRC. HMRC acknowledged both letters and confirmed that they had been shared with the relevant colleagues, but its substantive response was that it does not generally provide individual answers to feedback concerning policy or guidance. It did not identify the teams considering the issues, confirm that any technical review was under way, provide a timetable or answer a single substantive question.

Why Property118 is prepared to organise a challenge

Property118 does not approach collective litigation as a publicity exercise. In Alexander v West Bromwich Mortgage Company Ltd [2016] EWCA Civ 496, the Property118 Action Group organised a crowdfunded representative challenge after a buy-to-let lender sought to increase the margin on tracker mortgages and rely upon inconsistent standard conditions. The claim was unsuccessful at first instance, but Property118 and the borrowers continued to the Court of Appeal, where the appeal was allowed. An account published in Counsel magazine described the matter as the largest direct-access case of its time and explained the novel use of crowdfunding and the Bar Council’s escrow arrangements.

More recently, Property118 spent years preparing, organising and funding a ten-day First-tier Tribunal hearing against HMRC concerning the application of the Disclosure of Tax Avoidance Schemes legislation to its landlord incorporation model. That case required extensive documentary evidence, specialist representation, professional witnesses and sustained communication with hundreds of affected clients. Previous experience does not establish that any new challenge is legally arguable or guarantee that it would succeed, but it does show that Property118 understands the responsibility involved in asking others to support collective litigation and has the persistence to continue when the evidence and independent legal advice justify doing so. Our integrity should be judged by whether we publish the underlying material, explain the risks candidly and submit our own interpretation to specialist independent scrutiny rather than simply insisting that HMRC must be wrong.

We are considering a judicial review, not announcing one

HMRC’s manuals are not legislation, and HMRC is entitled to revise guidance where it concludes that the published material no longer reflects the law. The question is whether the replacement guidance is itself a correct and lawful explanation of the legal position, whether HMRC acted fairly when replacing a long-standing worked example and what protection may be available to taxpayers who relied upon the former published position. A judicial review would not ask the High Court to invent a concession for landlords or determine every taxpayer’s individual liability. It would ask the court to examine the lawfulness of HMRC’s decision, action or failure to act in the exercise of its public functions.

Property118 is therefore considering whether to raise funds to instruct specialist tax and public-law barristers at Devereux Chambers, whose members have substantial experience of tax-related judicial review involving HMRC guidance, practices and discretions. No fundraising campaign has yet been launched and no representation is being made that proceedings will necessarily be issued. The first task would be to establish whether specialist counsel considers there to be a properly arguable claim, who the appropriate claimant would be, when the relevant limitation period began, what evidence would be required and what remedy the court could realistically grant. That advice would need to be obtained quickly because Part 54 of the Civil Procedure Rules requires judicial review claims to be filed promptly and, ordinarily, within three months after the grounds first arose.

What it may cost to force an answer from HMRC

If a fundraising campaign is launched, it would proceed in stages so that supporters understand from the outset that the first target would fund the investigation and pre-action work rather than an entire High Court case and any subsequent appeal. The figures are provisional campaign milestones, not fixed quotations, and would have to be refined once specialist counsel had considered the case, the identity of the claimant, the evidence, HMRC’s response and the availability of costs protection.

Stage one: approximately £30,000

The first milestone would fund the initial legal and evidential investigation, analysis of the former and replacement manuals, consideration of the legislation and authorities, preservation and review of the available evidence, identification of an appropriate claimant, advice on standing and limitation, and preparation of a detailed pre-action case to HMRC. Reaching this stage would not guarantee that proceedings would be issued, but it would allow the issue to be examined properly and HMRC to be confronted with a legally structured challenge rather than another request for an explanation.

Stage two: approximately £150,000 in total

If counsel advised that proceedings should be issued and HMRC did not resolve the matter through the pre-action process, the next cumulative milestone would support preparation and issue of the judicial review claim, any required solicitors or authorised litigators, court fees, detailed grounds, claimant and supporting evidence, consideration of HMRC’s defence and preparation for the permission stage. Permission is required before a judicial review can proceed to a substantive hearing, and considerable work may be necessary before the court decides whether the full case should be heard.

Stage three: approximately £500,000 in total

If permission were granted, a cumulative fighting fund of approximately £500,000 might be required to prepare and conduct a substantive High Court hearing. That stage could involve further witness and documentary evidence, specialist accounting input, court bundles, written submissions, conferences, representation at the hearing, solicitors’ costs and appropriate insurance or other protection against an adverse costs order. The amount could be lower or higher depending on the breadth of the grounds permitted to proceed and the way HMRC chose to defend them.

Stage four: up to £1 million in total

An ultimate fighting fund of up to £1 million could provide resilience if either party sought to appeal and, once the BIM45700 issue and any appeal were adequately funded, could allow consideration of a related challenge to HMRC’s 20-hour incorporation guidance. The purpose of identifying the ultimate figure is not to suggest that one court hearing should cost £1 million, but to manage expectations honestly and recognise that a serious public-law challenge may involve several stages, unexpected developments and exposure to the other side’s costs.

Why we are publishing this before asking for money

Launching a fundraising page immediately would be straightforward, but establishing whether the professional community understands the risk and shares our concern is more important. We want accountants and tax advisers to examine the archived guidance and consider whether they or their firms relied upon it. We want PI brokers and insurers to assess whether historic advice could generate future notifications under claims-made policies. We want ICAEW, CIOT, ATT and other professional bodies to consider whether their members need authoritative clarification of the treatment of capital withdrawals, while lenders, mortgage brokers and landlord organisations should consider the consequences for businesses financed partly by proprietors’ personal capital and reinvested profits.

Most importantly, we want HMRC to recognise that declining to explain the rewrite does not make the uncertainty disappear; it transfers the cost and risk to taxpayers, advisers, insurers and potentially the courts. Landlords who refinanced in reliance upon professional advice should forward this article to their accountant or tax adviser and ask whether the former BIM45700 formed part of the analysis. Advisers who referred to the old guidance should preserve the version used, the advice provided, the capital account calculations and the relevant client correspondence, while PI insurers and brokers should consider whether the issue is capable of creating a notifiable circumstance across an insured book of tax and accountancy practices. Whether any notification is actually required will depend entirely upon the facts and the individual policy wording, but the common risk should not be ignored until the first claims arrive.

Property118 would welcome private or publishable responses from professional advisers, accountancy and tax bodies, PI brokers, claims directors and underwriters. We would also like to receive anonymised evidence of refinancing undertaken in reliance upon the former manual, including written advice, mortgage applications, balance sheets, capital account calculations and correspondence referring to BIM45700. Please email [email protected] using the subject line HMRC guidance and professional indemnity risk.

No assumption should be made that HMRC is legally wrong simply because its published answer has changed. It is, however, entirely reasonable to ask why two remarkably similar refinancing examples now appear to produce opposite results, what changed in the law and who will meet the cost if professional advice given under the former guidance is subsequently challenged. Professional advisers and their insurers should not have to wait for negligence claims to arrive before asking those questions.