As an owner manager of a business it’s possible to release equity from it by refinancing. The funds can be used to reduce or clear personal borrowing tax efficiently. How does this work?

Home loan interest

Until the 1990s, tax relief for home mortgage interest was a government policy seen as vital to a strong housing market. These days the tax relief is gone and almost forgotten. However, in a roundabout way it’s possible to resurrect it if you own shares in a company that you work for.

Shareholder conditions

While relief on home mortgage interest isn’t tax deductible, interest on a loan to buy shares in a close company, i.e. one that’s controlled by five or fewer individuals, is. For the interest to qualify for relief your company must be “trading”, that is, it must not exist to mainly hold investments. Plus, you must either work full time or own at least 5% of its ordinary share capital (the 5% shareholding can include shares your spouse owns).

Shuffling finances

In essence the plan is simple. It requires you to rearrange your finances so that you reduce the amount of borrowing to buy or improve your home and correspondingly increase that relating to funding the value of some or all of your shares. The result will be tax relief on the interest where none was allowed before.

Example. Ann owns 30% of the shares in Acom Ltd. They are worth around £400,000. Her husband, Clive, is an employee elsewhere. They are both higher rate (40%) taxpayers. Their home is worth £350,000 and they owe £100,000 on the joint mortgage. The annual interest payable is £5,000. They rearrange their borrowing as follows:

  • they take out a second mortgage of £100,000 on their home
  • Clive uses the money to purchase some of Ann’s shares in Acom. There’s no capital gains tax on the transaction because of the special rules which apply for transfers of assets between spouses and civil partners.
  • Ann uses the £100,000 received from Clive to repay the original mortgage.

Tip. If the value of Ann’s shares wasn’t sufficient to fully match their mortgage, the scheme would still work if they refinance part of the loan.

Voilà, tax relief!

The shuffle of finances means Ann reduces her shareholding in Acom (in favour of Clive) in return for cash which she uses to repay the mortgage on which no tax relief was allowed for the interest. At the same time the new borrowing was used by Clive to purchase shares in Acom. The interest on that loan meets the conditions for tax relief. Therefore, Clive can claim tax relief of £2,000 (£5,000 x 40%) on the interest he pays on the loan.


Our example is simplified to illustrate the principles. In practice, Ann and Clive might need to obtain valuations of Acom’s shares and their home. Plus, you’ll need to take account of lending fees and stamp duty at 0.5% of the value of the shares (£500). It might therefore take a year or two of extra tax relief to recoup these, but after that it will be money in the bank.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit or call 01233 653500.