Open letter to HMRC: What changed in the law behind BIM45690 and BIM45700?

Dear HMRC,

On 1 July 2026, HMRC amended several pages of its Business Income Manual dealing with interest relief, business funding and the withdrawal of capital by proprietors. The pages affected included BIM45690, “Funding the business”, BIM45700, “Withdrawal of capital from a business”, and related guidance concerning capital accounts and Silk v Fletcher.

These pages apply not only to trading businesses but also to property businesses. The changes are therefore directly relevant to individual landlords and property partnerships whose businesses have been financed through a mixture of personal capital and external borrowing.

HMRC’s published update record describes the amendments as providing “clearer context” and removing “unnecessary numerical calculations”. Having compared the former and replacement guidance, we are concerned that the numerical information removed was anything but unnecessary. It was the information that enabled taxpayers and advisers to distinguish between the legitimate withdrawal of capital and borrowing that genuinely financed additional private expenditure.

The revised guidance appears to adopt a materially narrower interpretation of when interest relief is available. If that is HMRC’s intention, taxpayers and professional advisers need to know what change in legislation or judicial authority supports it.

What HMRC’s former guidance said

Before July 2026, BIM45700 expressly recognised that a proprietor could withdraw profits and capital introduced into a business, even where substitute funding then had to be provided through interest-bearing borrowing.

The former guidance stated:

“The interest payable on the loans is an allowable deduction.”

It explained that the additional borrowing could be regarded as providing working capital for the business, subject to an appropriate restriction where the proprietor’s capital account became overdrawn.

The practical principle was reasonably clear. A business proprietor who had used personal savings to finance business assets was not necessarily required to leave that money locked into the business indefinitely. The proprietor could withdraw capital genuinely introduced and allow a commercial lender to replace them as the source of finance.

This was not presented as an unlimited entitlement. Relief could be restricted where drawings exceeded the proprietor’s capital and accumulated profits, or where the underlying facts demonstrated that borrowing was financing private expenditure rather than the business.

The former numerical examples were important because they showed where HMRC considered that boundary to lie.

HMRC’s former property example could hardly have been clearer

The Office of Tax Simplification reproduced a longstanding BIM45700 example in its 2022 review of residential property income.

In that example, Mr A owned a London flat with a market value of £375,000 and an existing mortgage of £80,000. He moved to Holland, brought the flat into his rental business and increased the mortgage by £125,000. He withdrew the additional £125,000 and used it to buy a flat in Rotterdam.

The total mortgage was therefore £205,000 against a property introduced into the letting business at a value of £375,000. Mr A’s capital account remained substantially in credit.

The former HMRC guidance concluded that the mortgage interest was allowable in full. It explained that the borrowing was funding the transfer of the property into the business at its open market value and that Mr A’s capital account was not overdrawn.

The private use of the £125,000 did not determine the outcome. Mr A used it to acquire a private home in Rotterdam, but the borrowing was nevertheless treated as replacing part of the capital represented by the property within the rental business.

The Office of Tax Simplification described this as a longstanding example showing that interest on a loan raised to allow a business owner to withdraw capital could qualify for relief, provided the owner’s capital account did not become overdrawn. It also observed that HMRC therefore appeared to accept that this could satisfy the wholly and exclusively requirement.

What the revised guidance now says

The current BIM45700 still begins by acknowledging that a proprietor may withdraw profits and capital introduced into a business, even where replacement funding must then be provided through interest-bearing loans.

It immediately qualifies that statement by saying:

“Simply exchanging existing capital for loan finance does not on its own satisfy the wholly and exclusively test.”

The guidance then states that interest is allowable where the borrowing is used for business expenditure or the acquisition of assets used in the business.

That wording appears to move the emphasis away from what the borrowing replaces within the business and towards what the proprietor does with the money released.

The revised BIM45700 includes an example involving Mrs H, who rents out a house in London and moves to Paris for work. She increases the mortgage on the rental property and uses the additional funds to buy her new private residence in Paris. HMRC concludes that the interest on the additional borrowing is not allowable because the money was used to acquire a private asset.

The factual resemblance to the former Mr A example is striking.

Mr A increased the mortgage on his London rental property and used the money to buy a home in Rotterdam. The former guidance allowed the interest because the borrowing remained within the value of the property introduced into the business and his capital account was not overdrawn.

Mrs H increases the mortgage on her London rental property and uses the money to buy a home in Paris. The revised guidance denies the interest because the money is used privately.

The examples may not be identical because the revised example omits the figures and capital account information that would allow a proper comparison. That omission is precisely the problem. We are not told how much capital Mrs H introduced, what the property was worth when it entered the business, whether the borrowing exceeded that amount, or whether she had already withdrawn her capital.

The calculations removed from the former guidance were not merely an accounting distraction. They established whether the proprietor was withdrawing capital genuinely standing to their credit or borrowing beyond their economic interest in the business.

BIM45690 goes further

The revised BIM45690 appears to make HMRC’s new interpretation even clearer.

Its third example concerns Ms Rashid, who starts a business using her own private funds to acquire an office, stock and a van. Two years later, she borrows the same amount that she originally introduced, withdraws the money and uses it to pay for a private holiday.

HMRC concludes that the interest is not allowable because the purpose of obtaining the loan was to facilitate a personal withdrawal and the funds were used for a non-business purpose.

This is not an example in which the proprietor borrows more than the capital originally introduced. The loan is expressly stated to be for the same amount as the private funds used to start the business.

The revised example therefore appears to say that the replacement of genuine business capital with external borrowing fails the wholly and exclusively test whenever the returned capital is spent personally.

That is materially different from the practical position conveyed by the former BIM45700.

Withdrawing capital is not necessarily the same as borrowing for private expenditure

Suppose a landlord buys a rental property for £300,000 using a £200,000 mortgage and £100,000 of personal savings.

Several years later, the landlord increases the mortgage from £200,000 to £300,000 and withdraws £100,000.

The mortgage lender has now provided the £100,000 of finance that the landlord originally provided personally. The property remains in the rental business. The landlord has not borrowed more than the original acquisition cost and has withdrawn no more than the capital genuinely committed to the business.

The landlord may use the returned £100,000 to fund retirement, repay personal debts, help a child purchase a home or take an expensive holiday. Those choices are personal, but the money being spent is the landlord’s own returned capital.

A materially different situation would arise if the landlord had already withdrawn the original £100,000 and then increased the mortgage by a further £50,000 to finance personal expenditure. In the absence of further capital contributions or accumulated profits available for withdrawal, the additional £50,000 could not readily be characterised as replacing capital still committed to the business.

That is the distinction the former guidance appeared to address through the capital account analysis.

The relevant question should therefore be whether the borrowing replaces capital or realised profits genuinely represented within the business, or whether it finances drawings beyond those amounts. The answer should not be determined solely by asking what the proprietor did with their money after the capital had been returned.

The same principle applies to refurbishment and refinancing

Consider a landlord who acquires an unmortgageable property for £200,000 in cash and spends a further £50,000 making it suitable for letting.

The commercial plan from the outset is to complete quickly, refurbish the property and then refinance it onto a conventional buy-to-let mortgage. Once the work is completed, the landlord obtains a mortgage of £150,000.

The property business required £250,000 of capital. Initially, the landlord provided all of it. Following refinancing, the landlord continues to provide £100,000 and the commercial lender provides £150,000.

The refinancing does not create the property asset or retrospectively pay the purchase price. It changes the source of finance supporting the same continuing business asset.

There is no logical distinction between this example and the landlord who originally purchased with a £200,000 mortgage and £100,000 of personal capital before later increasing the mortgage by £100,000. Both involve the replacement of personal capital with external finance.

The commercial reasons for using personal capital initially may include purchasing an unmortgageable property, completing at auction, securing a substantial discount, avoiding the delay of a conventional mortgage or carrying out works before long-term funding becomes available.

These are ordinary business decisions. They should not be treated less favourably merely because the proprietor was able and willing to commit personal capital before approaching a commercial lender.

What does section 34 actually require?

The statutory test remains section 34 of the Income Tax (Trading and Other Income) Act 2005. Broadly, expenditure is not deductible unless it is incurred wholly and exclusively for the purposes of the trade or property business.

We are not aware of any recent amendment to section 34 that expressly changes the treatment of replacement borrowing. Nor are we aware of a binding judgment from the Upper Tribunal or higher courts establishing that the former BIM45700 interpretation was wrong.

HMRC’s manuals do not have the force of legislation, and HMRC is entitled to amend its interpretation where it concludes that its guidance does not accurately reflect the law. A substantive change to longstanding guidance should nevertheless be accompanied by a clear explanation of the legislation or judicial authority on which the new interpretation is based.

Describing the amendments as clearer context and the removal of unnecessary calculations does not provide that explanation.

How does the revised approach reconcile with Scorer v Olin?

HMRC continues to quote Scorer v Olin Energy Systems Ltd in BIM45665. The Special Commissioners observed:

“It does not necessarily follow that the purposes of the loan can be ascertained by looking at the immediate use.”

HMRC’s own summary says that the purpose of a loan is a question of fact to be decided from the available evidence in each case.

That principle appears highly relevant to replacement finance.

The immediate movement of the mortgage advance into the proprietor’s personal account does not necessarily establish that the borrowing finances private expenditure. It may represent the return of capital that was previously used to acquire or improve a continuing business asset.

The source, history and commercial function of the funding should form part of the factual enquiry. The immediate destination of the money may be relevant, but HMRC’s own authority suggests that it is not necessarily conclusive.

What does Silk v Fletcher establish?

The revised manuals also place increased emphasis on Silk v Fletcher.

HMRC’s own summary explains that the taxpayer’s capital account was overdrawn, that drawings exceeded profits in each of the relevant years and that some of the borrowing had effectively subsidised those excess drawings. The taxpayer was unable to establish that all the loans continued to be used for business purposes.

There is nothing controversial about restricting relief where borrowing finances drawings beyond the capital and profits available to a proprietor.

That is not the same as concluding that interest must be disallowed whenever a proprietor withdraws capital genuinely standing to their credit and spends that returned capital personally.

The current BIM45705 says that an overdrawn capital account is only an indication that borrowing may have funded private drawings. It also says that a capital account remaining in credit does not, by itself, prove that the interest is allowable. The underlying facts must be examined.

We accept that a credit balance should not operate as an automatic statutory safe harbour. Accounting entries cannot replace an examination of the actual transaction.

It does not follow that the capital account is irrelevant. It remains powerful evidence of whether the proprietor is withdrawing capital and profits genuinely represented within the business or drawing money that can only have been supplied by additional borrowing.

Why the change matters to property investors

The revised interpretation could affect far more than unusually aggressive refinancing arrangements.

It could affect landlords who:

• purchased properties using personal savings before obtaining long-term mortgage finance;
• acquired properties that lenders initially regarded as unmortgageable;
• completed quickly to secure an auction purchase or commercially negotiated discount;
• funded refurbishment works personally before refinancing;
• repaid mortgages from personal capital during periods of high interest rates and later wished to restore their original capital;
• accumulated profits in a property business before withdrawing them as part of retirement or succession planning; or
• made long-term business decisions in reliance upon HMRC’s published examples.

The point is not that every refinancing transaction must automatically qualify. The facts and purpose of each loan must be examined.

The concern is that HMRC’s new examples appear to treat personal use of the capital released as sufficient to deny relief, even where the borrowing does no more than replace funds previously used wholly for the business.

If that is the intended position, proprietors are effectively being told that they may introduce personal capital into a business but cannot later replace it with external borrowing unless they recycle the returned money into further business expenditure.

That would leave personal capital trapped within the business as the price of preserving relief on replacement finance. Such a restriction requires a clear legal basis.

How will historic refinancing be treated?

Landlords and other business proprietors have arranged financing by reference to HMRC’s published manuals over many years.

The Office of Tax Simplification itself reproduced the former BIM45700 example in 2022 as evidence of the longstanding treatment. The practical significance of the guidance was therefore recognised outside HMRC as part of an official government review.

Taxpayers now need to know whether HMRC regards its July 2026 amendments as:

1. a change of interpretation applying only to new borrowing;
2. a change applying to interest arising after July 2026 on existing borrowing;
3. a correction that HMRC intends to apply to all open tax periods; or
4. merely a clarification that is not intended to change the outcome where borrowing genuinely replaces capital.

People who arranged commercial transactions in good faith by reference to HMRC’s former published position deserve a clear answer.

Questions for HMRC

Property118 respectfully asks HMRC to address the following questions:

1. Does HMRC accept that the former BIM45700 example involving Mr A allowed interest relief even though the additional mortgage advance was used to buy a private residence in Rotterdam?
2. Why does the revised example involving Mrs H appear to reach the opposite conclusion when additional borrowing against a London rental property is used to buy a private residence in Paris?
3. Were the capital account figures removed because HMRC no longer regards the amount of capital introduced and remaining available for withdrawal as relevant?
4. Does the revised BIM45690 Example 3 mean that HMRC will deny relief whenever a proprietor borrows an amount equal to their original capital contribution and then spends the returned capital personally?
5. Does HMRC accept any circumstances in which personal capital genuinely introduced into a business may be replaced by external borrowing while the returned capital is used outside the business?
6. What statutory wording or judicial authority supports the proposition that the proprietor’s personal use of returned capital determines the purpose of the replacement borrowing?
7. How does that interpretation reconcile with the observation in Scorer v Olin that loan purpose cannot necessarily be established by looking at the immediate use of the money?
8. What aspect of Silk v Fletcher supports denying relief where the proprietor’s drawings do not exceed the capital and realised profits genuinely represented within the business?
9. What evidence would HMRC regard as relevant when determining whether borrowing replaces capital, including acquisition records, refurbishment expenditure, balance sheets and contemporaneous refinancing plans?
10. From what date does HMRC intend its revised interpretation to apply, and how will taxpayers who relied upon the former guidance be treated?

A request for transparency

HMRC is entitled to amend its manuals where it concludes that existing guidance does not correctly reflect the law.

The former BIM45700 did more than contain unnecessary calculations. It stated a principle, applied that principle to a detailed property example and reached a clear conclusion. The Office of Tax Simplification subsequently relied upon that example when explaining the taxation of residential property businesses.

The replacement guidance appears capable of reversing that conclusion by treating the proprietor’s personal use of returned capital as decisive.

If the law has changed, HMRC should identify the legislation.

If the courts have clarified the law, HMRC should identify the judgment.

If HMRC has simply changed its interpretation, it should say so openly, explain why and clarify how historic transactions will be treated.

Property118 therefore respectfully asks HMRC to publish a detailed technical explanation of the legal basis, intended scope and commencement of the revised guidance. Landlords, business proprietors and professional advisers should not be left to discover the practical effect of a potentially substantive policy change during the course of an enquiry.

Since publishing this Open Letter we have also published the two further related articles, linked below:

HMRC’s latest overreach: Since when did your own capital stop being yours?

HMRC’s quiet rewrite could trap profits landlords have already paid tax on

Yours faithfully,

Mark Alexander
Founder of Property118.com

Update 28/07/2026 – HMRC has responded as follows:

Dear Mr Alexander,

Thank you for your email and open letters.

I acknowledge receipt of your correspondence and have shared it with the relevant HMRC colleagues.

HMRC does not generally provide individual responses to feedback relating to policy or guidance matters and, accordingly, will not be commenting directly on the specific points raised in your letter.

HMRC keeps its guidance under regular review and monitors feedback received in relation to all updates to ensure that it provides clear and practical support for users.