Tax relief on loan interest re property business - 80% restriction?

Tax relief on loan interest re property...

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I am looking at a client's very simple rental business at the moment:

  • There is a single property valued at £146,000 when lettings commenced.
  • There are two mortgages with an aggregate value of £164,000 (£120k + £44k the latter was taken out as equity release when the property's value was much higher)

I would usually expect that the interest that could be claimed against the rental income arising would be all of that arising on the first mortgage and a portion (26/44 of the interest on the second) and this seems to be in accordance with HMRC's BIM45690 and BIM45700.

However, one of our partners has given me a newspaper article dating back to 2004, when the Revenue's new stance on loan interest apparently began, stating that "You cannot claim tax relief on more than 80% of the property's current value. For example if you buy a property for £100,000 and immediately rent it out, you can only claim tax relief on £80,000 of the borrowings."

I can't find any authority for (or indeed any mention of) this restriction anywhere. Am I missing something?

Does anyone have any idea where this restriction comes from and whether or not it is still valid?

Many thanks in advance

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