PIM2052 - Deductions: interest: overview
Source: gov.uk (2025-10-29)


Property businesses subject to Corporation Tax

Interest is deductible under the loan relationship regime (see the Corporate Finance Manual (https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual) for further details). So, unlike income tax, interest is not an expense in computing the property business profits.

For non-resident corporate landlords brought within scope of CT from 6 April 2020, interest expenses arising prior to that date are not loan relationship debits - see CFM32100 (https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm32100) for further details.

Property businesses subject to Income Tax - restrictions since 2017/18

For tax years up to and including 2016/17, interest payable on loans used to buy land or property which is used in the property business, or on loans to fund repairs, improvements or alterations, is deductible in computing the profits or losses of the property business in the same way as other expenses.

Similarly, interest payable under hire purchase agreements or on an overdraft is deductible where the asset is used for business purposes.

For tax years 2017/18 to 2019/20, there are restrictions on the extent to which interest and other finance costs payable on loans to buy residential let properties may be deducted in computing the profits or losses of a property business for income tax purposes. From 2020-21 onwards, no deduction is allowed in calculating the profits. An individual customer may deduct from his or her tax liability for the year an amount equivalent to the otherwise unrelieved interest and finance costs multiplied by the basic rate of tax for the year in question. The net effect of these changes is that interest and finance costs are relievable only at the basic rate of tax rather than at a customer’s highest rates.

The restrictions also apply in respect of interest on loans taken out by individuals to invest in partnerships which are carrying on residential property businesses, where the interest would otherwise be relievable by virtue of sections 383 and 398 of the Income Tax Act 2007.

For more detail, including how this affects trusts and partnerships, see PIM2054 (https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim2054) onwards.

General rules

In addition to these restrictions, the normal property business rules apply, see PIM1900 (https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1900) onwards, including the “wholly and exclusively” rule and the rules governing the timing of relief (see PIM1100 (https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1100) onwards). A customer cannot, for example, deduct interest on a private loan, such as a loan used to buy their private residence. Where part of the customer’s own residence is let see PIM2100 (https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim2100).

Similarly, the interest on a loan or overdraft may not be allowable, or only part may be allowable, where the customer, for example, uses the borrowing:

to buy non-property business investments (which may be shown in the balance sheet as assets),

to buy private assets or assets for their family,

for the provision of private funds to be taken out from the property business.

Deciding what interest, if any, can be deducted may be difficult, particularly where the customer’s account with the business is overdrawn. That is, where the customer has drawn out more money than the profits of the property business. The loan may have, for example, partly financed the property business and partly met private living expenses. Interest on a borrowing that is used to fund private living expenses or other non-business expenditure isn’t allowable.

For advice regarding the incidental costs of loan finance see PIM2105 (https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim2105).

Interest on a partner’s capital account with the business isn’t deductible. It is merely an allocation of the property business profit and is taxed as property income.

For more detailed guidance about the deduction of interest see BIM45650 (https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim45650) onwards.

Interest payable on property only partly used for property business

A property may be let for short periods in a tax year or only part of it may be let throughout a tax year (or both); the rest of the time the property is used for private or non-business purposes. Here the interest charged on a qualifying loan on that property has to be split between the property business use and the private or non-business use. The split is done in whatever way produces a fair and reasonable business deduction, taking account of both the proportion of business use and the length of business use.

You don’t have to split the interest if the customer is genuinely trying to let the property but it is empty because they have not been able to find a tenant. In this case the interest will meet the “wholly and exclusively” test. It won’t meet this test if they have not been trying to let the property or they have been using it for private or non-business purposes.

Interest and rent-a-room

Interest paid on a loan used to buy a property cannot be claimed as a deduction in the property business if rent-a-room relief has been claimed. There is more information about rent-a-room relief at PIM4000 (https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim4000) onwards.

Legislative tests

The profits of a property business are calculated in the same way as the profits of a trade. Therefore where interest may be deducted in computing the profits of a property business, it must meet the following criteria.

It must be payable wholly and exclusively for the purposes of the property business.

If it is paid to a person not resident in the UK, the deductible element must not be at more than a reasonable commercial rate (see PIM2130 (https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim2130)).

Remember that under the property business rules, relief is given for interest payable on the accruals basis (not interest paid) unless the cash basis is used, see PIM1090 (https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1090).

The guidance on interest as a trade expense at BIM45650 (https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim45650) onwards applies equally to interest as a property business expense.

Interest rate hedging instruments

Where an interest rate hedging contract such as a swap or cap is taken out to hedge interest payments which are deductible in computing the profits or losses of a property business, then profits or losses on that contract will normally be taxed or relieved as receipts or deductions of that property business. This is because trading principles are imported into the property income computation rules. Profits and losses on such instruments should normally be computed on an accruals basis so that payments and receipts are allocated to the periods to which they relate, without regard to the periods in which they are made or received or become due and payable, in accordance with normal accounting practice.

For more on the tax treatment of swaps held by IT payers see PIM2066 (https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim2066).