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, the funding of unincorporated businesses and the withdrawal of capital by proprietors. The pages affected include 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 are financed partly by capital introduced by the proprietors and partly by external borrowing.

HMRC’s published update record describes the amendments to BIM45690 and BIM45700 as providing clearer context for the examples and removing unnecessary numerical calculations. Having compared the former and replacement wording, we are concerned that this description does not adequately convey the practical significance of the changes.

The revised guidance appears to represent a materially narrower interpretation of when interest relief is available where a proprietor withdraws capital previously introduced into a business and replaces that capital with external borrowing. If that is HMRC’s intention, taxpayers and professional advisers need to understand what change in legislation or judicial authority supports the revised position.

What the former guidance said

Before the July 2026 amendments, 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 that:

“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 proprietor who had personally financed the acquisition or operation of a business was not necessarily required to leave that capital invested indefinitely. The proprietor could withdraw capital genuinely introduced into the business and allow a commercial lender to replace them as the source of finance.

The availability of relief was limited by the amount of capital and accumulated realised profits properly standing to the proprietor’s credit. The former guidance did not permit an unlimited deduction for borrowing used to finance drawings in excess of the proprietor’s economic interest in the business. It did, however, recognise an important distinction between withdrawing capital previously invested and borrowing to fund entirely new private expenditure.

That distinction has been relied upon by landlords, accountants and tax advisers for many years when considering refinancing transactions.

What the revised guidance now says

The current BIM45700 continues to acknowledge that a proprietor may withdraw profits and capital introduced into a business, even though subsequent funding may then have to be provided by interest-bearing loans.

It then adds that:

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

The guidance goes on to say that interest is allowable where the borrowing is used for business expenditure or the acquisition of assets used in the business. The revised examples also place increased emphasis upon the proprietor’s immediate use of the money released by the borrowing.

The result appears to be that replacing proprietor finance with external finance may no longer be sufficient. HMRC now seems to require the proceeds of the replacement borrowing to be applied to fresh business expenditure or new business assets before the interest will be accepted as having been incurred wholly and exclusively for the purposes of the business.

If that interpretation is correct, the revised guidance is not simply a clearer explanation of the former position. It changes the practical answer in transactions that the previous wording appeared expressly to accept.

What does the revised guidance mean in practice?

The practical problem can be illustrated by an entirely ordinary property transaction.

Suppose a landlord identifies a residential property being sold at an attractive price because the seller requires a fast and certain completion. The property may require refurbishment before a mainstream lender will consider it suitable security, or the time required to arrange a mortgage may cause the landlord to lose the opportunity.

The landlord intends from the outset to purchase the property, carry out refurbishment works, improve its rental value and then refinance it onto a conventional buy-to-let mortgage. Refinancing is therefore not an afterthought or a device introduced to extract money from the property business. It forms part of the documented commercial plan from the beginning.

The landlord pays £200,000 in cash to acquire the property and spends a further £50,000 of personal funds on refurbishment. Once the works are complete, the property is let and the landlord obtains a £150,000 buy-to-let mortgage secured against it.

The property remains within the same rental business throughout. It continues to generate taxable property income and the mortgage lender has replaced part of the personal capital which the landlord temporarily committed to acquire and improve the business asset.

Under HMRC’s former guidance, the position appeared reasonably clear. The landlord had introduced £250,000 into the property business and could withdraw part of that capital when substitute funding became available, subject to the relevant capital account limitations. The mortgage interest would then fall within the property finance-cost rules, including the statutory restriction applicable to individual landlords of residential property.

The revised guidance appears capable of producing a different result. If the landlord uses the £150,000 released by the refinancing to acquire another rental property or meet other identifiable property-business expenditure, HMRC may accept that the borrowing has a business purpose. If the landlord instead restores personal savings, repays temporary private funding or uses the returned capital outside the property business, HMRC may argue that the interest does not qualify because the immediate application of the refinancing proceeds was private.

That creates an obvious inconsistency.

Had the landlord borrowed £150,000 to acquire the original property on the day of purchase, there would ordinarily be no dispute that the borrowing funded a property-business asset. The fact that the landlord subsequently refurbished the property, increased its value or used other personal resources elsewhere would not alter the original business purpose of the mortgage.

In the refinancing example, the property, mortgage balance and continuing rental business are economically the same. The only material difference is the sequence of the financing. The landlord initially used personal capital to secure a commercially advantageous purchase and introduced external borrowing once the property was suitable for conventional mortgage finance.

The economic reality is that the property business required £250,000 of funding. Initially, the landlord supplied the whole amount. Following refinancing, the landlord continued to provide £100,000 and the commercial lender provided £150,000. The lender has replaced the landlord as the source of finance for part of the same continuing business asset.

It is difficult to understand why the availability of interest relief should depend upon whether the mortgage was arranged immediately before or shortly after completion, particularly where the planned refinancing can be demonstrated through contemporaneous evidence.

Cash purchases followed by refurbishment and refinancing are common throughout the property sector. They arise where properties are unmortgageable in their existing condition, where speed and certainty enable a buyer to negotiate a better price, or where bridging or cash finance is used temporarily until a property becomes suitable for long-term lending.

These are ordinary commercial transactions. They are not inherently artificial arrangements designed to manufacture an interest deduction.

HMRC’s revised guidance nevertheless appears capable of penalising a landlord for adopting a commercially sensible financing sequence. It may favour the landlord who incurs mortgage debt at the point of acquisition while denying equivalent treatment to the landlord who temporarily deploys personal capital and refinances the same property after refurbishment.

We would therefore be grateful if HMRC would explain whether this is the intended effect of the revised guidance.

What changed in the law?

The statutory test remains section 34 of the Income Tax (Trading and Other Income) Act 2005, under which 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 which expressly changes the treatment of replacement borrowing. Nor are we aware of a binding Upper Tribunal, Court of Appeal or Supreme Court judgment establishing that the former wording of BIM45700 was incorrect.

If HMRC has identified new legislation or judicial authority that required the guidance to be rewritten, it would assist the profession if HMRC identified it.

If there has been no such legal development, it appears that HMRC has changed its interpretation of legislation which remains materially unchanged. HMRC is entitled to revise its interpretation, but where longstanding guidance has been relied upon in arranging commercial transactions, the reason for a substantive change should be explained transparently.

How does the revised guidance reconcile with Scorer v Olin?

HMRC continues to refer in BIM45665 to Scorer v Olin Energy Systems Ltd. The cited reasoning includes the important observation that:

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

That principle appears particularly relevant to replacement finance.

Where a proprietor originally supplies the funds required to acquire a business asset, and a commercial lender subsequently replaces part of that funding, the immediate use made of the capital returned to the proprietor may not conclusively determine the purpose of the loan.

The proprietor’s subsequent use of the returned capital is distinct from the commercial function performed by the replacement borrowing. The borrowing may continue to finance the property business by replacing capital previously used wholly for acquiring and improving the income-producing asset.

The revised BIM45700 examples nevertheless place substantial emphasis upon the private use of the money released. We would therefore be grateful if HMRC would explain how that approach is reconciled with the reasoning from Scorer v Olin which remains quoted in its own manual.

Does Silk v Fletcher justify the revised position?

The revised guidance also places increased emphasis upon Silk v Fletcher. That case involved a proprietor whose drawings exceeded the profits of the business and whose capital account was overdrawn. The tribunal examined whether some of the borrowing was in reality funding private drawings rather than the business.

That principle is not controversial. Where a proprietor withdraws more than the capital and realised profits properly available, it may be reasonable to conclude that part of the borrowing is financing private expenditure.

The working example set out above is materially different. The landlord has introduced £250,000 of genuine personal capital into the property business. The property remains within the business, and the landlord withdraws no more than the amount previously introduced. The external mortgage replaces part of the landlord’s funding rather than financing drawings in excess of the landlord’s capital interest.

The former guidance appeared to recognise this distinction. The capital account limitation provided a mechanism for separating the legitimate withdrawal of introduced capital from excess drawings funded by borrowing.

The revised BIM45705 now states that a capital account remaining in credit does not itself demonstrate that the interest is allowable, just as an overdrawn account does not conclusively prove that borrowing has funded private expenditure. We accept that accounting entries cannot replace an examination of the underlying facts.

The more fundamental question is whether Silk v Fletcher supports the proposition that replacement borrowing loses its business purpose merely because the proprietor uses the capital returned to them personally, even where the proprietor has not withdrawn more than the capital and realised profits genuinely invested in the business.

We would welcome HMRC’s analysis of that distinction.

Is HMRC distinguishing replacement finance from private borrowing?

There is a clear difference between borrowing to finance new private expenditure and borrowing to replace capital already committed to a business.

Suppose a landlord owns a rental property worth £300,000, originally acquired using a £200,000 mortgage and £100,000 of personal capital. If the landlord increases the mortgage to £300,000 and uses the additional £100,000 for a private purpose, there is a legitimate question as to whether the increased borrowing has any business purpose.

That is not the same as a landlord who originally acquires and improves a property using £250,000 of personal funds, and subsequently introduces a £150,000 mortgage against the continuing business asset. In the second case, the borrowing has replaced part of the proprietor funding which made the acquisition and refurbishment possible.

The revised guidance risks treating both transactions as though they are equivalent because the landlord ultimately receives money which may be used privately. That approach appears to overlook the origin and continuing function of the capital within the business.

The question should not be determined solely by asking what the proprietor did with the money after it was returned. It should also examine why the borrowing was introduced, what it replaced, the amount of capital genuinely invested, the continuing business assets and the commercial plan which existed when the property was acquired.

How will taxpayers who relied on the former guidance be treated?

HMRC’s manuals do not have the force of legislation, but they influence real commercial decisions. Landlords and other business proprietors have refinanced assets and withdrawn introduced capital in reliance upon the published position that substitute borrowing could continue to qualify, provided the relevant limitations were observed.

The current update record does not alert taxpayers that HMRC may now challenge transactions which the former wording appeared expressly to accept. Describing the amendments as providing clearer context and removing unnecessary calculations is unlikely to convey to a reasonable reader that HMRC’s practical interpretation may have changed.

We would therefore be grateful if HMRC would confirm whether the revised position is intended to apply to borrowing entered into only after 1 July 2026, to interest arising after that date on existing borrowing, or to all open periods irrespective of the guidance in force when the refinancing was arranged.

Taxpayers who made commercial decisions in good faith by reference to HMRC’s published manuals deserve clarity about how those historic arrangements will be treated.

Questions requiring clarification

To assist landlords, business proprietors and their professional advisers, we respectfully ask HMRC to answer the following questions:

1. Does HMRC accept that external borrowing can replace personal capital genuinely and demonstrably committed to acquiring or improving an asset used in a continuing business?
2. Why should the tax treatment differ where the mortgage is introduced after acquisition rather than on the acquisition date, where refinancing formed part of the original commercial plan?
3. Does HMRC regard the proprietor’s subsequent use of the capital released by refinancing as decisive, even where the borrowing replaces funds previously used wholly for the business?
4. Does contemporaneous evidence that refurbishment and refinancing were planned from the outset affect HMRC’s analysis?
5. Does HMRC still accept that a proprietor may withdraw capital genuinely introduced into a business without the replacement borrowing being treated automatically as funding private expenditure?
6. What statutory wording or judicial authority requires refinancing proceeds to be applied to fresh business expenditure or another business asset before interest relief can be obtained?
7. How does the revised guidance reconcile with the reasoning quoted by HMRC from Scorer v Olin?
8. What aspect of Silk v Fletcher supports applying the revised approach where the proprietor’s capital account is not overdrawn and the withdrawal does not exceed genuine capital introduced?
9. From what date does HMRC intend the revised interpretation to apply, and how will taxpayers who relied upon the former guidance be treated?
10. Why was a technical explanation of this potentially substantive change not published alongside the amendments?

A request for transparency

HMRC is entitled to amend its manuals where it concludes that the existing guidance does not accurately reflect the legislation or relevant judicial authorities. Where a longstanding and widely relied-upon passage is replaced with wording capable of producing a materially different tax outcome, taxpayers and advisers should be told why.

This issue is not about claiming relief for borrowing genuinely undertaken to finance private expenditure. It concerns the commercially distinct situation in which a proprietor temporarily uses personal capital to acquire or improve a business asset and subsequently allows a commercial lender to replace part of that funding.

The former BIM45700 guidance appeared to recognise that distinction. The revised guidance appears to place it in doubt.

Property118 therefore respectfully asks HMRC to publish a detailed technical explanation of the legal basis, intended scope and commencement of the revised interpretation. That clarification would reduce uncertainty, prevent inconsistent treatment and enable landlords and their advisers to make properly informed commercial decisions.

Yours faithfully,

Mark Alexander
Founder of Property118.com