Bridging Loans and Interest: Claiming Tax Relief When Refinancing

What Is a Bridging Loan in a Business Context?

A bridging loan is a short-term finance facility, typically lasting between a few weeks and 24 months, used to 'bridge' a gap between purchasing a new property and selling an existing one, or while longer-term finance is arranged. For limited companies refinancing commercial or mixed-use property, bridging loans are common — but the tax treatment of the interest is frequently misunderstood.

Who This Guide Is For

This article is aimed primarily at limited company directors whose company owns business property. If your company is taking out a bridging loan to refinance, purchase, or develop property used wholly or partly for trading purposes, the rules below apply to you. Sole traders holding property personally face different rules under the loan relationship provisions and should seek specific advice.

The Basic Rule: Interest as a Deductible Expense

For UK limited companies, interest paid on loans — including bridging loans — is governed by the loan relationships rules under the Corporation Tax Act 2009. Provided the loan is taken out wholly and exclusively for the purposes of the company's trade or property business, the interest is deductible against corporation tax. This means it reduces your company's taxable profit at the current corporation tax rate of 25% (for profits above £250,000).

Key Conditions HMRC Requires You to Meet

• Purpose test: The bridging loan must be used for a qualifying business purpose — purchasing, refinancing, or improving property used in the trade. Personal use of funds, even temporarily, can disqualify the deduction.
• Wholly and exclusively: If the property has any personal or non-business use, only the business proportion of the interest qualifies for relief. Keep clear records of use from day one.
• Accounting treatment: Under UK GAAP (FRS 102), interest on bridging loans should be expensed through the profit and loss account as it accrues. HMRC will generally follow this treatment for tax purposes.
• The loan must be a money debt: Bridging finance structured as equity or mezzanine finance may fall outside the loan relationships rules and requires separate analysis.

When Relief May Be Restricted or Denied

HMRC scrutinises bridging loan arrangements carefully, particularly where the interest rate is above market rate, the loan is between connected parties, or the purpose of refinancing is unclear. Transfer pricing rules can apply to connected-party loans, meaning the interest deduction may be capped at a rate HMRC considers arm's length.

Additionally, if your company is subject to the Corporate Interest Restriction (CIR) rules — broadly applying where net interest expense exceeds £2 million per year — the deductible amount may be further limited. Most small limited companies will fall below this threshold, but it is worth checking if your group has significant borrowing.

Practical Steps to Protect Your Tax Relief

• Document the purpose immediately: Keep board minutes or written records confirming why the bridging loan was taken out and how funds were applied.
• Separate business and personal finances: Never route bridging funds through a director's loan account without clear documentation of the onward business use.
• Get a market-rate agreement in writing: If borrowing from a connected party, agree the interest rate in writing and benchmark it against commercial rates.
• Ensure your accountant accrues interest correctly: Interest should be recognised in the accounts in the period it relates to, not just when paid.
• Retain all loan documentation: HMRC can enquire into corporation tax returns up to six years later. Keep the facility agreement, drawdown notices, and repayment schedules.

What About Arrangement Fees and Legal Costs?

Bridging loans often carry significant arrangement fees. Under the loan relationships rules, these fees are generally spread over the life of the loan using the effective interest rate method, rather than deducted in full when paid. Legal costs directly related to arranging the loan are typically deductible as revenue expenditure, but costs related to acquiring the property itself may be capital and not immediately deductible.

The Bottom Line

Bridging loan interest can be a valuable tax deduction for limited companies refinancing business property — but only if the purpose is clearly documented, the accounting treatment is correct, and the arrangement meets HMRC's conditions. Get this right from the outset and you could reduce your corporation tax bill meaningfully during what is often an expensive period of transition.