Thanks for your response
Under Property Income legislation see that at the time the property was introduced to renting its value according to you (and I assume you have valuations to back this up) was £350K
So you could have (after renting commenced) mortgage up to the equivalent of this value - but only borrowed £200K
The legisaltion you need to appeal this is BIM45665 - which states (see below)
BIM45665 (‘Interest: must be paid wholly and exclusively for business purposes’) states:
‘Interest is allowable as a deduction in computing business profits or losses if it is incurred wholly and exclusively for the purposes of the business. This will be the case where the borrowed money is used to finance the acquisition of business assets, such as plant and machinery or property, or to provide working capital for the business, paying business costs. The interest is then incurred wholly and exclusively for the purposes of the business.
‘A crucial point is the use made of the funds during the period when the interest accrues. This is explained further in the following paragraphs. The use of the funds may change – it is not fixed forever by the initial purpose for which the loan was obtained.’
You can deduct the interest on a loan up to a maximum of the market value of the property when you started letting it.
The next consideration is what the loan(capital borrowed) is used for and that is of NO consequence at all - as you are using the rental property and as the loan is secured against it - there interest becomes allowable.
You used it for purcahse your current residence which is actually one of the allowable examples HMRC provide in the Business Income manual - you have full grounds of appeal on this basis see example 2
Link here for this https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim45700
Let me know if I can assist further - but if you have all that you need, then it would be appreciated if you could rate me for the level of service I have provided (or click accept) the fact you took out a buy to let mortgage alters nothing as example 2 also highlights!