Many people who take out a secured loan wonder whether any of the interest they pay can be offset against their tax bill. It is a reasonable question, and the answer depends almost entirely on what the loan is used for, not on how it is structured or what it is secured against.
This guide explains the general tax position for secured loans in the UK, covers the scenarios where interest relief may apply, and sets out what to consider before making any claim to HMRC. It does not constitute tax advice. Anyone unsure about their specific circumstances should speak with a qualified accountant or tax adviser before filing a claim.
At a Glance
- Secured loans used for personal purposes are not tax deductible in the UK. HMRC does not allow relief on interest paid on loans taken out for personal use regardless of how the loan is structured or what it is secured against. Home improvements, debt consolidation, and personal purchases are all in this category: what this means in practice.
- The interest element (not the principal) may be deductible when the loan funds a business or qualifying investment. The primary test HMRC applies is what the borrowed money was actually spent on, not the lending product used. Only the interest qualifies; the capital repayment never does: business and investment scenarios.
- Buy-to-let landlords face specific restrictions on interest relief since April 2020. The Section 24 changes replaced full interest deductibility for residential portfolios with a 20% basic rate tax credit, which has increased the effective tax rate for higher rate and additional rate taxpayers: the landlord position explained.
- Business owners and self-employed borrowers may claim interest as an allowable expense. Provided the loan is used wholly for business purposes and the purpose is clearly documented, the interest is generally deductible against taxable profits for sole traders, partnerships, and limited companies: how this works in practice.
- Accurate record-keeping is essential for any interest claim. HMRC can investigate claims at any point, and inadequate documentation is one of the most common reasons interest deductions are challenged or disallowed. The burden of proof rests with the taxpayer: what HMRC expects.
- Tax rules change; always verify your position against current HMRC guidance or with a qualified adviser. A deduction that applies today may be restricted or removed in a future Budget. The cost of accountancy advice is itself typically an allowable expense: common questions answered.
Personal Use: Why Secured Loans Are Not Tax Deductible
HMRC does not allow tax relief on interest paid on loans taken out for personal purposes. This applies regardless of whether the loan is secured against a property, a vehicle, or any other asset. The security arrangement is a matter between the borrower and the lender; it has no bearing on how the interest is treated for tax purposes.
Common personal uses of secured loans include home improvements, debt consolidation, funding a wedding, buying a car, or covering day-to-day expenses. None of these give rise to a tax deduction on the interest paid. Even when a home improvement increases the value of a property, HMRC does not treat the interest on the loan used to fund it as a deductible expense for the individual homeowner. The distinction that matters to HMRC is not what the loan is secured against, but what the borrowed money is actually spent on.
If a secured loan is used partly for personal purposes and partly for a qualifying business or investment purpose, it may be possible to apportion the interest and claim relief only on the qualifying portion. This is a complex area and specialist accountancy advice is strongly recommended before attempting any such claim. You can read more about how secured loans work as a starting point.
Business and Investment Use: When Interest May Be Deductible
When a secured loan is used wholly and exclusively for a qualifying business or investment purpose, the interest paid on that loan may be treated as an allowable expense and offset against taxable income or profits. The key test, in HMRC’s view, is whether the money was genuinely used for the stated business or investment purpose, not simply whether the borrower is in business.
The most commonly encountered scenarios where interest relief may apply are outlined below. It is important to note that these are general descriptions of how the rules tend to work, not a guarantee that any particular claim will be accepted. Tax treatment depends on individual circumstances, the nature of the borrowing, and current HMRC guidance.
Buy-to-let landlords
Residential property: restricted since 2020
Landlords with residential properties face specific restrictions on interest relief since April 2020. Rather than deducting interest directly, a 20% basic rate tax credit applies. For commercial property, different rules apply and full interest relief may still be available. See the dedicated section below.
Business owners
Business use: generally allowable
Interest on a secured loan used wholly for business purposes is generally an allowable expense against business profits. This applies to sole traders, partnerships, and limited companies, subject to how the loan is recorded and whether the purpose can be evidenced.
Investment use
Income-producing assets: narrow rules
In some circumstances, interest on a loan used to fund an investment in shares or other income-producing assets may be deductible. The rules here are narrow and the conditions complex; specialist advice is essential before making any claim.
Self-employed
Self-employed borrowers: purpose must be evidenced
A self-employed person who uses a secured loan to fund business equipment, premises improvements, or other qualifying expenses may be able to claim interest as a business expense in their self-assessment return, provided the purpose is clearly documented.
Buy-to-Let Landlords: The Position Since 2020
Residential buy-to-let landlords were significantly affected by changes introduced under Section 24 of the Finance (No. 2) Act 2015. Before the phased changes took full effect in April 2020, landlords could typically deduct mortgage interest and other finance costs in full from their rental income before calculating their tax liability. That is no longer the case for most residential portfolios.
Since April 2020, residential landlords are no longer permitted to deduct finance costs, including interest on secured loans, directly from rental income. Instead, a tax credit worth 20% of the finance costs is applied against the final tax bill. For a basic rate taxpayer, the practical outcome is broadly similar to the old system. For a higher rate or additional rate taxpayer, the change can mean a substantially higher tax bill on the same level of rental income, because the gross rental income is now taxed in full before the credit is applied.
It is worth noting that this restriction applies to loans secured on residential buy-to-let property. Different rules apply to furnished holiday lettings and to commercial property, where it may still be possible to deduct finance costs in full. The rules in this area have been subject to ongoing change, and landlords should verify their position with an accountant or tax adviser who specialises in property.
If a landlord takes out a secured loan to fund improvements to a rental property, the treatment of that interest may differ from the treatment of the original purchase or remortgage finance. A qualified adviser can help establish how the costs should be apportioned and recorded. Secured loans for property improvements are a common use case, but the tax implications for landlords are not straightforward.
Business Owners and Self-Employed Borrowers
For business owners and self-employed borrowers, the interest on a secured loan used wholly and exclusively for business purposes is generally an allowable deduction against taxable profits. The key conditions HMRC applies are that the loan must be used for the business (not for personal expenditure), that the borrower is legally responsible for the debt, and that adequate records are kept to demonstrate the purpose and use of the funds.
For sole traders and partnerships, allowable interest is typically declared in the self-assessment tax return (SA100 form). For limited companies, the interest is treated as a financing cost in the company accounts and included in the corporation tax return (CT600). The interest reduces the taxable profit, which in turn reduces the corporation tax or income tax liability. Arrangement fees paid to secure the loan may also be deductible in some cases, though this depends on how they are structured and accounted for.
A common situation involves a business owner taking out a secured loan against their home or business premises to fund expansion, purchase equipment, or bridge a cash flow gap. Provided the borrowed funds are demonstrably used for the business, the interest cost is likely to be allowable. If any portion of the funds is used for personal purposes, only the business proportion of the interest can be claimed, and clear documentation is needed to support the apportionment. Secured loans for self-employed borrowers outlines the broader lending considerations for this group.
What Can and Cannot Be Claimed
The table below summarises the general tax treatment of different components of a secured loan in common scenarios. These are generalisations based on how HMRC rules typically apply; individual circumstances vary and this table is not a substitute for professional advice.
| Component | Personal borrower | Buy-to-let landlord (residential) | Business owner / self-employed |
|---|---|---|---|
| Capital repayment (principal) | Not deductible | Not deductible | Not deductible |
| Interest paid | Not deductible | 20% basic rate tax credit only (since April 2020) | May be fully deductible as a business expense |
| Arrangement fee | Not deductible | May be treated as a finance cost (subject to Section 24 restriction) | May be deductible depending on how it is structured |
| Legal fees related to the loan | Not deductible | Complex; specialist advice needed | May be deductible if directly linked to the business purpose |
It is worth re-emphasising that the above applies to the interest on the loan, not the loan amount itself. Borrowing money is not income, and repaying the capital is not an expense; HMRC treats both as capital transactions that sit outside the income and expenditure calculation. This principle applies equally to sole traders, limited companies, and landlords.
Record-Keeping: What HMRC Expects
Any claim for tax relief on loan interest must be supported by adequate records. HMRC can investigate claims made in tax returns, and inadequate documentation is one of the most common reasons interest deductions are challenged or disallowed. Keeping organised records from the point the loan is taken out is far easier than reconstructing them later.
The records that are typically needed to support an interest deduction include the loan agreement itself (showing the purpose, term, rate, and repayment schedule), a breakdown of each repayment into principal and interest components, evidence of how the borrowed funds were used (such as bank statements, invoices, or receipts), and any correspondence with the lender regarding the loan structure. For landlords, it is also helpful to retain evidence linking specific loan drawdowns to specific property expenditure.
Accounting software can make this significantly easier by separating interest payments from capital repayments automatically. A qualified accountant will typically set this up as part of the annual accounts process, but it is good practice to understand the distinction yourself and to flag any changes in use of the loan funds to your adviser promptly. Understanding the APR and true cost of a secured loan is a useful foundation for understanding how much of each repayment is interest versus capital.
Risks, Limitations, and What to Watch For
The following table outlines the main considerations for borrowers who are contemplating whether their secured loan interest may be deductible. These are not intended to be exhaustive but cover the most commonly encountered issues.
| Consideration | Why it matters |
|---|---|
| Purpose of the loan | HMRC’s primary test. A loan used for personal purposes attracts no relief regardless of who the borrower is. |
| Mixed-use loans | If part personal and part business, only the business proportion of interest may be claimed. Apportionment must be clearly evidenced. |
| Changing use of funds | If funds are initially used for business but later redirected to personal use, the deductible portion may reduce or disappear entirely. |
| Section 24 (residential landlords) | Full interest deduction is no longer available for most residential buy-to-let borrowers; only a 20% basic rate tax credit applies. |
| Rule changes | Tax legislation changes regularly. A deduction that applies today may be restricted or removed in a future Budget. |
| Professional advice | Incorrectly claimed deductions can result in penalties and interest charges from HMRC. The cost of accountancy advice is typically worthwhile. |
It is also worth being aware that the security itself, the asset used as collateral for the loan, can have separate tax implications in some situations. If a business sells an asset that was used as security, capital gains tax or other reliefs may apply to the transaction. The loan interest deduction and the tax treatment of the underlying asset are separate questions. Understanding the risks of secured loans more broadly is a useful companion to the tax considerations covered here.
Ready to see what you could borrow?
Checking won’t harm your credit scoreFrequently Asked Questions
Can I claim tax relief on a secured loan I used for home improvements?
No, not if the property is your main residence and the improvements are for personal benefit. HMRC does not allow individuals to deduct interest on loans used for home improvements against their income tax liability, even if those improvements increase the value of the property. The fact that the loan is secured against the property makes no difference to this position.
The only exception that might arise is if a portion of your home is used exclusively for business, for example a dedicated home office or a room you let out commercially. In that case, a proportionate share of certain costs may be allowable, but this is a complex area and the rules are strict. A qualified tax adviser can assess whether any relief is available based on the specific circumstances of your property and how it is used.
Can I deduct the interest on a secured loan used to buy equipment for my business?
Broadly speaking, yes, provided the equipment is used wholly for business purposes and the loan is clearly documented as having been taken out for that purpose. The interest element of each repayment is typically an allowable expense that can be set against the business’s taxable profits, reducing the income tax or corporation tax liability accordingly. The capital repayments are not allowable.
It is also worth considering whether capital allowances may apply to the cost of the equipment itself, separately from the interest deduction on the loan. Annual investment allowance and other capital allowance reliefs can allow the full cost of qualifying assets to be deducted in the year of purchase, and these operate independently of how the purchase was financed. An accountant can help structure the claim to make the most of both reliefs where they apply.
I am a buy-to-let landlord. Can I still deduct my secured loan interest in full?
Not if the loan is secured on a residential buy-to-let property. Since April 2020, the full interest deduction that was previously available to residential landlords has been replaced by a 20% basic rate tax credit. This means the gross rental income is now assessed to tax before the credit is applied, which can result in a higher effective tax rate, particularly for higher rate and additional rate taxpayers.
If your secured loan relates to a commercial property or a furnished holiday letting, different rules may apply and full interest deductibility may still be available. The rules in this area are subject to ongoing change, and landlords should review their position with a specialist property tax accountant each year. Understanding whether a secured loan is right for your situation more broadly is also worth considering before restructuring your property finance.
What records do I need to keep to support an interest deduction claim?
At a minimum, you will need the original loan agreement, a schedule showing how each repayment is split between principal and interest, and evidence that the borrowed funds were used for the stated purpose. For business borrowers, this typically means bank statements showing where the funds went, invoices or receipts for the expenditure, and any correspondence with the lender. For landlords, it is helpful to link specific drawdowns to specific property expenditure.
HMRC can open an enquiry into a tax return at any point within a certain window, and the burden of proof rests with the taxpayer. Keeping organised, complete records from the outset is the most effective way to protect any claim. If records are incomplete or cannot be produced on request, HMRC may disallow the deduction and impose a penalty. Accounting software that separates interest from capital automatically can make this significantly easier to manage.
Does the type of secured loan affect whether the interest is deductible?
No. Whether the loan is structured as a second charge mortgage, a business secured loan, an asset-backed facility, or another product, the deductibility of the interest is determined by the purpose of the borrowing and who the borrower is, not by the technical structure of the lending product. A second charge mortgage used to fund a business investment is treated the same as any other business loan for tax purposes, and a personal secured loan used for home improvements is non-deductible regardless of the label attached to the product.
It is worth noting that different products carry different costs and risks. For example, a second charge mortgage secured on a residential property puts the home at risk if repayments are not maintained, regardless of whether the interest qualifies for tax relief. Understanding the borrowing product and its costs is a separate exercise from understanding the tax treatment, and both are important before taking on secured debt.
What happens if I use a secured loan for both personal and business purposes?
If a loan is used for mixed purposes, it may be possible to claim relief on the proportion of interest that relates to the business use. However, this apportionment must be clearly evidenced and the methodology must be reasonable. HMRC will not accept a claim for the full interest amount if part of the loan was clearly used for personal expenditure, and there is a risk that a poorly evidenced mixed-use claim leads to the entire deduction being disallowed.
Where possible, it is preferable to take out separate loans for personal and business purposes to avoid the apportionment problem entirely. If that is not practical, detailed records should be kept from the outset showing exactly how the funds were used, with clear documentation of the split. Any changes in use during the life of the loan should be recorded promptly, as the deductible proportion may change over time as the underlying use of the funds changes.
Squaring Up
Secured loans used for personal purposes do not attract tax relief in the UK. The interest may be deductible when a loan is used wholly for a qualifying business or investment purpose, but only the interest element qualifies; the capital repayment never does. Buy-to-let landlords with residential portfolios face a more restricted position since the Section 24 changes took full effect in 2020, with a 20% tax credit replacing the former full interest deduction. Business owners and self-employed borrowers are generally in a stronger position, provided the loan purpose is clearly documented and evidenced.
Tax rules change, and the right answer in one year may not be the right answer in the next. A qualified accountant is the most reliable source of advice on whether interest on a specific loan, in a specific situation, is deductible. The cost of that advice is itself typically an allowable expense.
Ready to see what you could borrow?
Checking won’t harm your credit score Check eligibilityThis article is for informational purposes only and does not constitute financial or tax advice. Tax treatment depends on individual circumstances and is subject to change. Always consult a qualified accountant or tax adviser before making any claim to HMRC. Your home may be at risk if you do not keep up repayments on a secured loan.
