A buy-to-let property is purchased for £200,000 with a mortgage of £150,000 and is let immediately. Two years later, the property is valued at £250,000 and the loan is increased to £200,000. The view was that all the interest on the increased loan was tax-deductible as the loan did not exceed the capital introduced into the business (the initial capital value of the property). This was the case even if the capital had been extracted and used for a private purpose. Is tax relief due on the additional borrowing up to the capital value even if it is used for a private purpose?

Arthur Weller replies:
If you look at HMRC’s Business Income manual at www.gov.uk/hmrc-internal-manuals/business-incomemanual/bim45700 (Example 2), and BIM45690 (Example 3), you can see that tax relief is available on the additional borrowing up to the capital value even if it is used for a private purpose. However, all this is subject to the new rules from April 2017, restricting tax relief on interest for residential landlords. See www.gov.uk/hmrc-internalmanuals/property-income-manual/pim2054.