At the beginning of July 2026, HMRC amended several pages of its Business Income Manual relating to business funding and specifically to the withdrawal of capital from unincorporated businesses (BIM45690 – Funding the business and BIM45700 –Withdrawal of capital from a business). HMRC says the changes give clearer context and remove unnecessary calculations – but many commentators believe that the way in which the text has been written restricts interest relief on borrowing used to fund capital withdrawals from a business.

Basic law

Tax law states that interest is allowable only if incurred ‘wholly and exclusively’ for the purposes of the business. ‘Business’ applies to trading activities and property businesses. The test looks at the purpose of the borrowing, not simply where the money ends up. Where a loan serves both business and private purposes, the interest must be apportioned, with only the business element being deductible.

Before the rewrite, a business owner could withdraw capital they had introduced plus accumulated profits. If the business replaced that funding with borrowing, full interest relief was allowed, even if the money was withdrawn for personal use, the only restriction being where the drawings made the capital accountoverdrawn.

Change in guidance

The updated guidance states that ‘simply exchanging existing capital for loan finance does not on its own satisfy the wholly and exclusively test’. It adds that interest remains allowable where the borrowing is used for business expenditure or to acquire assets used in the business. However, some commentators read this as meaning that interest on substitute borrowing will almost always fail, because a capital withdrawal is intrinsically private in purpose.

HMRC's example 3 in BIM 45700 explains that when officers are considering how much of a loan has a private purpose, they should look at the borrower's purpose when the funding was obtained and at what could have been withdrawn without the loan.

As an example, if a business property is remortgaged and that extra capital is invested back into the business for repairs, etc., so long as the value of the capital in the business is not exceeded then full interest relief remains deductible.

Problem

The rewrite potentially creates a problem where the owner has invested their own money in the business and now wishes to withdraw that money for personal use. If the if the full original funding was via a loan, interest will be deductible in full.

The following example shows the differences between the pre- and post-July 2026 text:

Sarah put £100,000 of her own money into her business. She withdraws £60,000 for personal use, and the business borrows £60,000 to replace it at 5% interest. The loan remains in the business, so under the old guidance the £3,000 annual interest was fully deductible. Under the rewritten guidance, HMRC could argue that the loan's purpose was to fund the private withdrawal and disallow the interest. Had Sarah originally funded the property with £40,000 of her own savings and a £60,000 loan, the same £3,000 interest would be deductible in full, and it is this inconsistency that is concerning.

Overdrawn capital account

HMRC’s text states that The instruction to officers is that further investigation may be needed to ascertain whether personal drawings have resulted in the overdrawn capital account and, if financed by borrowing, then to restrict any interest.

Is this a new rule?

The rewrite may simply be bringing the manual into line with how some officers already viewed these situations. HMRC's rewritten guidance suggests they may now challenge interest relief more readily where the withdrawn money is used personally.

Practical point

The revised sections cover unincorporated trades and property businesses only, so companies, which fall under the loan relationship rules, are not directly affected. Note that manual guidance is not law, so taxpayers can still appeal if interest is disallowed.