Remortgaging a Buy-to-Let: The Tax Rules Landlords Get Wrong

The remortgage itself: no tax event

Start with the reassuring part. Remortgaging — whether a straight product switch or a bigger loan with cash released — is not a taxable event:

• No income tax on the money released — borrowed cash is debt, not income.
• No CGT — you haven’t disposed of anything; the property is still yours.
• No SDLT — no land or beneficial interest changes hands (unlike a transfer to a spouse, where an assumed mortgage can trigger it).

Everything that matters happens afterwards, on your tax return, through one question: what was the new borrowing for?

The purpose test: three clean cases

• Like-for-like refinance. New loan replaces the old property-business loan, same amount. The interest stays a finance cost of the business and qualifies for the 20% Section 24 credit (22% from April 2027). Higher rate on the new fix simply means a bigger credit.
• Equity released to buy, improve or repair another rental. Also clean — relief follows the use of the funds, not the security. Borrowing against Property A to put a deposit on Property B, or to fund a new roof on Property C, is business borrowing.
• Companies. A limited company deducts qualifying loan interest in full against Corporation Tax — Section 24 doesn’t apply. The same purpose principle governs whether the borrowing is for the business.

The messy case: equity out for personal use (BIM45700)

For years, HMRC’s Business Income Manual at BIM45700 said a proprietor may withdraw the capital they introduced to the business — broadly, borrow up to the value of the property when it was first let — and claim relief on the interest even if the withdrawn cash paid for a wedding, a car or the family home. Thousands of landlords structured refinancing around that example.

More recently HMRC has rewritten the guidance and challenged claims that relied on it, arguing relief fails where the funds are withdrawn for private purposes — while denying its position ever changed. The capital-account principle (relief until the account is overdrawn) still has firm roots in tax law for businesses generally, but for individual landlords this is now genuinely contested ground:

• Borrowing beyond the property’s value at first letting for private use: interest on the excess has never been relievable. That part isn’t in dispute.
• Borrowing within that value for private use: historically allowed by HMRC’s own manual; now at risk of challenge. If you rely on it, document the capital-account computation and expect questions.
• Replacing existing business debt is safe regardless — the controversy is only about extracting equity for private spending.

Practical read: if the released cash is going anywhere personal, price in the possibility of no relief on that slice of interest — and if the sums are large, take professional advice before you draw down, not after.

Fees, ERCs and the CGT trap at sale

• Arrangement, product and broker fees on business borrowing are finance costs — relieved via the same 20% credit for individuals, not deducted from profit. See our fees guide.
• Early repayment charges paid to refinance a property-business loan are generally treated as costs of loan finance too.
• Valuation and legal costs of the remortgage follow the same finance-cost route when the borrowing is for the business.
• The sale-day trap: your CGT base cost is purchase price plus improvements — the mortgage is irrelevant. Landlords who remortgaged heavily can sell, repay the lender, and still face a CGT bill bigger than the cash left over. Equity release spends the gain early; it doesn’t shelter it.

A worked example

Dan remortgages a flat he first let when it was worth £200,000. Old loan: £120,000. New loan: £180,000 at 4.9% (£8,820 interest a year). Of the £60,000 released, £40,000 becomes the deposit on a second buy-to-let and £20,000 pays for a family car.

Eight-ninths of Dan’s interest is safely within the property business either way. The only slice at risk is the £20,000 that went private — and because the total loan stays under the £200,000 first-let value, Dan’s fallback is HMRC’s own historic capital-account guidance. He keeps the computation on file.

Frequently asked questions