Qualifying Loan Interest Relief: Full Marginal Rate Tax Deduction in 2026/27

Most taxpayers are aware that mortgage interest on buy-to-let properties is only available as a 20% basic rate tax credit. Far fewer know that interest on loans used to invest in their own company, a business partnership, or to buy equipment for their job qualifies for full marginal rate relief -- up to 45% for additional rate taxpayers. This qualifying loan interest relief is one of the most underused deductions available to business owners and investors, and it can make borrowing to invest in your own company significantly more tax-efficient than other forms of leveraged investment.

Why qualifying loan interest is different from buy-to-let interest

The contrast with residential property mortgage interest is stark:

A higher-rate taxpayer paying £10,000 in interest receives:

• Buy-to-let mortgage: £2,000 tax credit (20%).
• Qualifying loan interest: £4,000 tax relief (40%).

The qualifying route is worth double for a 40% taxpayer -- and triple for an additional-rate taxpayer compared to a basic-rate deduction.

Moreover, because qualifying loan interest is deducted from total income (not from rental income), it reduces the taxpayer's adjusted net income -- which can also reduce the High Income Child Benefit Charge and the Personal Allowance taper, creating additional savings.

Loans to invest in a close company

The most common application of qualifying loan interest is a director or shareholder who borrows personally to invest in their own company. The conditions:

Condition 1: The company must be a close company. A close company is one controlled by 5 or fewer participators (broadly, shareholders), or by any number of participators who are directors. Almost all small private UK companies are close companies.

Condition 2: You must have a material interest. A material interest means you own (or after the investment will own) more than 5% of the ordinary share capital of the company, or you are a full-time officer or employee. "Full-time" generally means working substantially all your working hours in the company.

Condition 3: The loan proceeds must be invested in the company. You must use the borrowed funds to subscribe for shares in the company or to lend money to the company. The loan must reach the company -- you cannot borrow and then use the money for something else and claim relief on the interest.

Condition 4: The qualifying investment must be maintained. The relief continues only while the loan proceeds remain invested. If you withdraw capital from the company (beyond ordinary salary and dividend payments), the relief may be restricted.

Loans to invest in a partnership

If you are a member of a trading partnership (including an LLP), interest on a loan taken out to:

• Acquire your partnership share.
• Introduce capital into the partnership for use in the business.
• Lend money to the partnership for use in the business.

...qualifies for full marginal rate relief, provided the partnership is carrying on a qualifying trade (not mainly investments).

The relief continues while you remain a partner and the loan proceeds remain employed in the partnership.

Loans to buy plant and machinery

Interest on a loan to purchase plant or machinery used in:

• Your employment (for tools, equipment, or vehicles required for your job that your employer does not provide).
• A partnership in which you are a member (for business equipment).

...qualifies for relief. The plant or machinery must be used in the qualifying activity -- mixing personal use with business use may restrict the relief proportionately.

The £50,000 cap for close company loans

For loans to invest in close companies, the qualifying loan interest relief is limited to interest on the first £50,000 invested in any single company by the individual. Loans above £50,000 do not generate additional qualifying interest relief.

This cap was introduced to prevent disproportionate relief on very large personal investments in single companies. It applies per company -- if you have invested qualifying amounts in multiple close companies, each attracts its own £50,000 limit.

How to maintain the relief

The qualifying interest relief is ongoing -- you claim it each year you pay interest. To maintain entitlement:

1. Keep the investment in the company. Do not withdraw the capital used for the qualifying investment. Dividends, salary, and loan repayments from the company to you personally do not affect the qualifying investment, but returning the subscribed share capital or repaying a qualifying loan made to the company does.

2. Retain your material interest. If your shareholding falls below 5% (e.g., because of dilution by new investors), check whether you still qualify as an officer or employee. If neither condition is met, the relief is withdrawn from that date.

3. Keep records. HMRC expects you to be able to demonstrate: the loan agreement, evidence of how loan proceeds were used (bank statements showing transfer to the company), the company's close company status, and your material interest.

Claiming on the tax return

Qualifying loan interest is reported on the SA101 Additional Information supplementary pages:

• Enter the total interest paid in the tax year.
• Specify the qualifying category (close company, partnership, or plant and machinery).
• HMRC deducts the amount from total income before calculating tax.

No prior approval from HMRC is required. The claim is self-assessed and may be subject to enquiry if HMRC considers the amounts material or the qualifying conditions unclear.