Bridging and Development Finance: How the Interest Is Actually Taxed

Ask five property people how bridging loan interest is taxed and you'll get five different answers, and most of them will be right for somebody, just not for you. A developer building to sell, an individual landlord bridging into a buy-to-let, and a company refinancing a stalled scheme are all working under different rules, and mixing them up is how people either miss a deduction they were entitled to or claim one HMRC later takes back with interest of its own.

Start with what kind of borrower you actually are

The tax treatment of bridging or development finance interest doesn't turn on the label the lender puts on the product. A twelve-month bridging facility and a three-year development loan raise exactly the same questions: who's borrowing, what are they borrowing for, and are they trading, investing, or doing it through a company. Get that classification right first, because every rule below hangs off it.

Developers: revenue expense or cost of work in progress

Where the borrower is a trading developer, sole trader or company, interest on finance used to fund a development is deductible in computing trading profit either way. The real question isn't whether relief is due, it's when. Some developers expense interest as it's incurred; others capitalise it into the cost of work in progress and release it against profit only when the units sell. Both are accepted accounting policies under UK GAAP, and HMRC generally follows whichever one the accounts consistently apply, because for a company the loan relationship rules in CTA 2009 broadly track the accounting treatment rather than imposing a separate tax timing rule on top of it. What matters is picking a policy and applying it consistently across the scheme, not switching between the two depending on which flatters this year's numbers.

Individual landlords: Section 24 doesn't care what the loan is called

For an individual, partnership or trust letting residential property, the position is far less generous. Section 24 restricts "finance costs" to a basic rate tax credit, and finance costs is defined broadly enough to catch any interest, arrangement fee or exit fee on borrowing used to acquire, improve or repair a let residential property, not just interest that happens to sit on a mortgage statement. A bridging loan used to complete quickly on a buy-to-let, refinanced onto a term mortgage six months later, is caught in exactly the same way as if the property had been bought with a mortgage from day one. The short-term, higher-cost nature of the facility doesn't change the analysis, and it doesn't buy an exemption.

Commercial property and, until recently, furnished holiday lets sat outside this restriction. That's narrower ground than it used to be: since the furnished holiday let regime was abolished from April 2025, FHL owners lost their exemption from Section 24 along with the other reliefs that used to set the category apart, so bridging finance used to acquire a holiday let is now restricted in exactly the same way as an ordinary residential mortgage.

Companies don't have this problem, until they do

A company letting or developing property gets full relief for interest against its profit, with no Section 24 restriction, which is the single biggest reason landlords incorporate. That doesn't mean the interest line is unconditional. The Corporate Interest Restriction rules can cap net interest deductions once a group's net financing costs pass a £2 million de minimis, which rarely bites a small developer SPV but is worth checking on a larger scheme funded across several group companies. And where the lender is a director or other connected participator rather than a bank, the late-paid interest rule matters: interest accrued to a connected party that remains unpaid more than twelve months after the end of the accounting period doesn't get relieved until it's actually paid, which catches out groups using director loans as informal bridging finance between external facilities.

Rolled-up interest: relief follows the accrual, not the redemption date

Bridging finance is frequently structured with interest rolled up and paid in a single lump sum at redemption rather than serviced monthly, and that structure leads to a common misconception: that no tax relief is due until the facility is redeemed and the interest is actually paid. On an ordinary accruals basis of accounting, that's wrong. Relief follows when the interest accrues under the loan agreement, exactly as it would if it were paid monthly, so a facility spanning two accounting periods gives relief split across both, not dumped entirely into the year of redemption.

The exception is landlords using the cash basis for property income, now the default for most individual landlords below the turnover threshold. Cash basis relief follows cash paid, not interest accrued, so a rolled-up facility redeemed eighteen months after drawdown gives no deduction at all until the year of redemption, whatever Section 24 then does to the rate of relief once it lands. That timing gap is worth building into cashflow planning before choosing a rolled-up facility over a serviced one, not discovered when the tax return is prepared.

VAT sits separately from the interest question entirely

The interest itself, and usually the lender's own arrangement fee, form part of an exempt supply of credit, so no VAT is charged on either. Broker fees for arranging the finance are often exempt on the same basis under the rules in VAT Notice 701/49, but not invariably, so it's worth checking what the invoice actually says rather than assuming. Valuation and legal fees tied to the borrowing are a different matter: they're standard-rated professional services, entirely separate from the loan itself, and whether that VAT is recoverable turns on what the borrowing is funding, a taxable development where input VAT normally comes back, or a residential letting where it usually doesn't.

What we're actually telling clients

Decide up front whether interest is being expensed or capitalised into work in progress, and stick with it for the life of the scheme. If you're an individual landlord, treat every fee on a bridging facility as a Section 24 finance cost the moment the money is used to acquire, improve or repair a let residential property, not just the headline interest rate. And if the facility rolls interest up to redemption, work out now whether your accounting basis gives you relief as it accrues or only when it's finally paid, because that answer changes how the loan should be planned around, not just how it's reported afterwards.

Common questions

Is bridging loan interest tax deductible?

Usually yes, but how depends on who's borrowing. A developer or trading company gets it deducted against trading profit, either as it's incurred or capitalised into work in progress and released on sale. An individual letting residential property gets relief only as a basic rate tax credit under Section 24, whatever the loan is called. A company letting property gets full relief against its rental profit, subject to the normal loan relationship rules.

Does Section 24 apply to bridging loan interest?

Yes, if the borrower is an individual, partnership or trust letting residential property. Section 24 restricts finance costs, not just mortgage interest by name, so bridging interest, arrangement fees and exit fees on a loan used to acquire, improve or repair a let residential property are all caught and relieved only at basic rate, regardless of the fact the facility is short-term.

When do I get tax relief on rolled-up bridging interest?

On an accruals basis of accounting, relief follows when the interest accrues under the loan agreement, not when it's actually paid at redemption, so a facility running for eight months across two accounting periods gives relief split across both. Landlords using the cash basis for property income are the exception: they get relief only when the interest is actually paid, which can mean no deduction at all until the facility is redeemed.

Is there VAT on bridging finance arrangement fees?

The interest itself and the lender's own arrangement fee are usually part of an exempt supply of credit, so no VAT is charged. Broker fees for arranging the finance are often exempt too, but not always, so it's worth checking the invoice rather than assuming. Valuation and legal fees tied to the borrowing are standard-rated and separate from the loan, and whether that VAT is recoverable depends on what the borrowing is actually funding.

This article is general information, not personal tax advice, and tax rules change. Your own position depends on facts we cannot see from here — please take advice before acting on anything above.

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