HS340 Relief

HS340 Relief on Loan Interest for Buy-to-Let Companies

Many landlords now use a limited company to hold their rental properties. Banks often feel more comfortable lending to the individual director rather than the new company. Because of that, you may borrow in your own name and then lend that money to your company as a director’s loan.

At this point an important question comes up.
Can you claim HS340 Relief on loan interest on that personal borrowing? In addition, how do the CIHC rules and the £50,000 or 25% income tax relief cap affect the claim?

This guide explains the full picture in simple English. It walks through the conditions for HS340 Relief, explains what a Close Investment-Holding Company (CIHC) means, and shows how the income tax relief cap can limit the deduction. Finally, it gives a worked example that pulls everything together.

What HS340 Relief on Loan Interest Covers

HS340 deals with qualifying loan interest. Under this relief, you can claim income tax relief on interest that you pay personally when the loan supports certain business or investment activities.

For property companies, the most common qualifying use looks like this:

You borrow money personally from a bank.
You use that money to buy shares in a close company, or
You lend that money to a close company as a director’s loan.

If the company and the loan both meet the HS340 conditions, the interest you pay on that personal borrowing counts as qualifying loan interest. You then claim HS340 Relief in your self assessment tax return.

This relief works alongside the company’s own deductions. The company can still claim a deduction for the interest that it pays on genuine business borrowing, including interest that it pays to you on your director’s loan.

Understanding Close Companies and CIHC Status

Before you rely on HS340 Relief, you must understand two linked ideas:

Close company status, and
Close Investment-Holding Company (CIHC) status.

These labels come from company tax legislation, but you can break them down into clear concepts.

What Is a Close Company?

A company counts as close when a small group of people control it. In practice, most buy-to-let SPVs are close companies because:

One person or a small group owns more than half of the shares, or
Directors together have control.

As a result, a typical property company that you set up to hold your own rentals almost always falls into the “close company” category. That is helpful, because HS340 Relief requires a close company as the borrower or the recipient of the loan.

What Is a Close Investment-Holding Company (CIHC)?

A Close Investment-Holding Company still counts as a close company, but it mainly holds investments rather than runs a real trade or a proper commercial property business.

The legal definition looks quite detailed. However, the main idea is simple:

A close company starts life treated as an investment-holding company.
It then steps out of CIHC status only if it exists wholly or mainly for certain “good” purposes.

Those good purposes include:

Trading on a commercial basis.
Investing in land and letting that land commercially to unconnected persons.

Therefore, when your company owns rental property and lets it on market terms to unconnected tenants, it usually moves out of CIHC status. That move matters because HS340 Relief does not work if the company stands inside the CIHC definition.

When a Property Company Avoids CIHC Status

For HS340 Relief to work for your buy-to-let company, the company should:

Own one or more properties.
Let those properties at market rent.
Let them to unconnected tenants, not to you or your close family.
Treat that commercial letting as its main activity.

When those conditions hold, the company generally counts as a close company that invests in land and lets it commercially. It then does not count as a CIHC. As a result, loans that you make to that company can still qualify for HS340 Relief, provided the other conditions also fit.

On the other hand, problems arise when:

The company mainly lets property to connected persons on non-commercial terms, or
It mostly holds cash, shares, or other passive investments.

In those cases, the company may fall inside the CIHC rules, which can block new HS340 claims. Because of that, you should always review how the company actually operates in each tax year.

How the Typical HS340 Buy-to-Let Structure Works

Now link the rules to a structure that landlords often use.

Personal borrowing
First, you take a loan from a bank in your own name. You sign the loan agreement and you agree to pay the interest.
On-lending to the company
Next, you transfer the funds to your property company. The company records a director’s loan. It now owes that amount to you.
Property purchase
Then the company uses the money to buy a rental property. The property belongs to the company, so the company receives all rental income and pays all running costs.
Ongoing interest flows
Finally, you pay interest to the bank on the personal loan. The company may pay interest to you on the director’s loan if you decide to charge it.

In this structure, HS340 Relief looks at the interest that you pay on the personal borrowing. If the loan qualifies, that interest reduces your personal taxable income.

At the same time, the company can deduct interest that it pays to you on the director’s loan or to any other lender in its own name. That deduction reduces its rental profit for corporation tax.

Conditions for Claiming HS340 Relief

For HS340 Relief on loan interest to apply, you must tick several boxes.

Loan and company conditions

Firstly, the loan must support a qualifying purpose:

You use the funds to buy ordinary shares in a close company, or
You use the funds to lend money to a close company.

Secondly, the company must not count as a CIHC. As discussed earlier, a property company that mainly invests in land and lets it on commercial terms to unconnected tenants usually meets this point.

Your personal conditions

In addition, you must satisfy personal involvement tests. These normally require that:

You own at least 5% of the ordinary share capital, or
You work for the greater part of your time in the management and conduct of the company’s business.

Most owner-managed property companies meet these conditions because the main director both controls the company and runs its affairs.

Record-keeping and evidence

Besides the legal conditions, you need clear evidence. Therefore you should:

Keep the bank loan agreement and annual interest statements.
Keep company accounts that show the director’s loan balance.
Keep simple board minutes or a loan agreement that explain the on-lending.

Good records make it easier to show the link between the personal loan and the funds introduced into the company.

The Income Tax Relief Cap – £50,000 or 25% of Adjusted Total Income

So far, the blog has focused on whether your loan qualifies. Another important limit sits on top of that. HS340 reminds you that qualifying loan interest forms part of the general cap on income tax reliefs.

How the cap works

The cap says that certain income tax reliefs together cannot exceed the higher of:

£50,000, and
25% of your adjusted total income for the year.

Qualifying loan interest under HS340 belongs inside this list. Other items in the list include certain loss reliefs and some share loss reliefs.

You start by working out your adjusted total income. You can think of this as your total taxable income after a few technical adjustments for things such as pension contributions and gift aid. The exact calculation can become detailed, yet the basic idea is that it reflects your real income level for the year.

Next, you calculate:

25% of that adjusted total income, and
Compare the result with £50,000.

The higher of those two amounts gives your maximum relief for all the capped reliefs combined.

Simple illustrations of the cap

Consider three quick snapshots:

If adjusted total income equals £80,000, then 25% gives £20,000. The cap becomes the higher of £50,000 and £20,000, so the cap stands at £50,000.
If adjusted total income equals £160,000, 25% gives £40,000. Again the higher number is £50,000, so the cap still sits at £50,000.
If adjusted total income equals £300,000, 25% gives £75,000. In that case the cap rises to £75,000.

These figures show an important pattern. Until your adjusted income goes above £200,000, the cap usually remains at £50,000. Once you pass that level, the 25% part of the formula can start to lift the cap.

HS340 Relief inside the cap

Now bring HS340 Relief back into the picture. Suppose:

Adjusted total income: £90,000.
Cap: higher of £50,000 and 25% of £90,000 (£22,500) = £50,000.
HS340 qualifying loan interest: £35,000.
No other capped reliefs.

Here, the total capped relief equals £35,000. This sits below the cap of £50,000, so you may claim the full £35,000 as HS340 Relief.

Change the numbers slightly:

Adjusted total income: still £90,000.
Cap: still £50,000.
HS340 qualifying loan interest: £40,000.
Trading loss set against general income: £20,000.

Now the total capped relief equals £60,000. The cap remains £50,000. In this case, you must limit the total relief to £50,000, and £10,000 of the relief cannot take effect in that year. You may sometimes carry a loss forward instead, but you will not get extra HS340 Relief above the cap.

Because of this cap, large personal borrowings and other relief claims need careful planning.

Worked Example – HS340 Relief in a Buy-to-Let Company

This example pulls together CIHC status, HS340 Relief and the income tax cap.

Background

Emma sets up Elm Property Ltd.
She owns 100% of the ordinary shares and runs the company.
Elm Property Ltd buys a flat for £300,000 and lets it on an assured shorthold tenancy to an unconnected family at market rent.
Emma borrows £200,000 personally from a bank at 6% interest.
She lends that £200,000 to Elm Property Ltd as a director’s loan.
She adds another £100,000 of her own savings as share capital.

During the year:

Elm Property Ltd receives rent of £18,000.
It pays repairs, insurance and agent fees of £5,000.
It pays Emma interest of 6% on the director’s loan: £12,000.
Emma pays the bank £12,000 of interest on her personal loan.
Her other income (salary and dividends from a different job) totals £110,000.
She has no other capped reliefs.

Step 1 – CIHC status

Elm Property Ltd owns land and lets it on commercial terms to an unconnected family. The property letting forms its main activity. As a result, the company invests in land and lets that land commercially to unconnected persons. It therefore falls outside the CIHC definition and counts as a normal close company for HS340 purposes.

Step 2 – HS340 qualifying loan interest

Emma borrowed personally and used the funds to lend money to a close company. She owns all the ordinary shares and manages the business. The company does not count as a CIHC. Consequently, the £12,000 interest that Emma pays to the bank qualifies for HS340 Relief.

Step 3 – Company tax position

Elm Property Ltd calculates its property profit:

Rent: £18,000
Less expenses: £5,000
Less interest paid to Emma: £12,000

Rental profit for corporation tax: £1,000.

The company pays corporation tax on £1,000 at the appropriate rate.

Step 4 – Emma’s personal tax position and the cap

Emma has:

Other income: £110,000.
Interest income from Elm Property Ltd: £12,000.
Total income before reliefs: £122,000.

Her adjusted total income will sit around that level, subject to any pension or gift aid adjustments. For simplicity, assume adjusted total income equals £122,000.

The cap then equals the higher of:

£50,000, and
25% of £122,000 = £30,500.

So the cap stands at £50,000.

Emma’s HS340 qualifying loan interest equals £12,000. She has no other capped reliefs. The total capped relief equals £12,000, which sits comfortably inside the £50,000 cap. She can therefore claim the full £12,000 HS340 Relief in her return.

This example shows how HS340 Relief, CIHC status and the relief cap all work together in a normal buy-to-let company structure.

Conclusion

HS340 Relief on loan interest can be very helpful when you borrow personally and use the funds to support a buy-to-let company. When you structure things correctly:

The company can deduct the interest that it pays on a genuine director’s loan.
You can claim HS340 Relief on interest that you pay on the personal borrowing used to fund the company.

However, several conditions must line up. Your company needs to count as a close company that mainly trades or invests in land and lets that land commercially to unconnected tenants, so that it avoids CIHC status. You must also meet the personal ownership and involvement tests. On top of that, the £50,000 or 25% income tax relief cap can limit the total HS340 Relief and other capped reliefs that you claim in a year.

If you monitor CIHC risk, plan around the relief cap, and keep strong records for both the personal loan and the director’s loan, HS340 Relief can sit at the heart of a clean and efficient structure for funding your buy-to-let company.

📞 Written by etaxfiling.co.uk

etaxfiling.co.uk is a leading UK tax advisory platform.
We specialise in inheritance tax, non-dom rules, and international tax planning.
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Published On: November 26th, 2025 / Views: 24 /

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