Borrowing money to invest sounds like a shortcut — take out a loan at a certain rate, put it into the market, and keep the difference. In practice, the gap between the cost of borrowing and what you actually earn is rarely as wide as the theory suggests. A loan at 6% and an investment return of 8% leaves you with 2% before tax — and that’s before costs, volatility, and the fact that your investment could just as easily fall by 20% as rise by 8%.
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This article is general information only and does not constitute professional advice. For your specific situation, consult a qualified professional.
Whether you’re a basic-rate taxpayer or a higher-rate one, the after-tax return on any investment shrinks the moment you factor in the cost of the loan. Borrowing to invest isn’t automatically wrong, but it’s a strategy that only works inside a narrow set of conditions. Most people who try it don’t account for all three variables — interest rate, tax, and volatility — at the same time. Here’s what you actually need to know.
What leveraging means for your money
What I tend to notice is that people focus on the potential upside — the idea that borrowing £10,000 at 6% and earning 10% leaves you with £400 profit. That’s true on paper, but only if the market goes up, the loan rate stays fixed, and you don’t need to sell early. The research from MoneyHelper makes clear that the return must exceed the cost of borrowing and risks must be controlled. That’s two conditions, not one.
What borrowing actually costs you
Personal loan rates in the UK vary depending on the lender, your credit score, and the amount you borrow. A typical unsecured personal loan might carry an APR of 6% to 12%, while a margin loan from a stockbroker could be lower — but carries its own risks. The interest you pay on the loan is a guaranteed cost. The investment return is not.
A basic-rate taxpayer pays 10% on capital gains above the annual allowance (£3,000 for 2024/25). A higher-rate taxpayer pays 20%. If you’re investing in shares that pay dividends, you also have the dividend allowance — currently £500 — above which basic-rate taxpayers pay 8.75% and higher-rate taxpayers pay 33.75%. Every one of these percentages eats into the gap between your loan cost and your investment return.
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| Taxpayer band | CGT on shares | Dividend tax rate | Annual exempt amount |
|---|---|---|---|
| Basic rate | 10% | 8.75% | £3,000 (CGT) / £500 (dividends) |
| Higher rate | 20% | 33.75% | £3,000 (CGT) / £500 (dividends) |
| Additional rate | 20% | 39.35% | £3,000 (CGT) / £500 (dividends) |
What this means in practice: if you borrow £10,000 at 6% and earn £800 in investment returns, a higher-rate taxpayer could lose £160 to capital gains tax alone. The net profit after tax and interest might be £240 — and that’s only if nothing goes wrong. An investment that returns 8% in a good year could just as easily return -8% in a bad one. The MoneyHelper guidance stresses that the risk of the investment falling in value is real, and the loan still needs to be repaid regardless.
Where the strategy falls apart
Underestimating volatility
Markets don’t move in a straight line. A 10% correction in the FTSE 100 is not unusual — it happens roughly once every two years on average. If you’ve borrowed to invest, a 10% drop on a £10,000 position costs you £1,000, but you still owe the full £10,000 plus interest. You’re now in negative territory before you’ve even factored in the loan cost. What I’d do in this situation is look at the worst one-year return of the asset you’re buying, not the average. The average tells you what might happen in a typical year. The worst case tells you what could happen to borrowed money.
Ignoring the timing of repayments
A personal loan requires fixed monthly repayments regardless of whether the market is up or down. If your investments are locked in a falling market, you might be forced to sell at a loss just to meet the repayment schedule. A margin loan from a broker is even more dangerous — the broker can demand repayment at any time if the value of your investments drops below a certain level. This is called a margin call, and it can happen within hours. The MoneyHelper research notes that the risk of being forced to sell at a low point is one of the most common ways people lose money with this strategy.
Forgetting the tax on the loan
For most individual investors in the UK, the interest on a loan used to buy shares is not tax-deductible. There are specific exceptions for loans used to buy shares in a close company or to invest in a partnership, but for a straightforward personal loan used to buy shares on the stock market, you cannot offset the interest against your investment income. This means you’re paying tax on the full investment return while still paying the full loan interest — a double hit that many people don’t account for until they file their self-assessment.
Evaluating whether borrowing to invest makes sense for you
Compare the loan cost to the investment’s expected return
The first question is simple: what is the interest rate on the loan, and what return do you realistically expect from the investment? If you’re borrowing at 8% and hoping for a 9% return, the margin is too thin to absorb any tax, costs, or volatility. Most financial planners suggest that the expected return should be at least double the borrowing cost to justify the risk. For a loan at 6%, that means looking for an investment with a realistic long-term return of 12% or more — which is well above the historical average return of the UK stock market. If you’re unsure about the numbers, getting a second opinion from a finance professional can help clarify whether the numbers stack up for your specific situation.
Check whether your investments are in a tax wrapper
A Stocks and Shares ISA shelters your investments from capital gains tax and dividend tax. If you’re borrowing to invest, putting the money inside an ISA means you keep more of the return. But there’s a catch: you can only contribute £20,000 per tax year into an ISA, and you must use cash that’s already yours — you can’t pay loan interest from inside the ISA. The loan interest still comes out of your taxed income, but the growth inside the ISA is tax-free. This is one of the few scenarios where borrowing to invest can make more sense, but only if you can afford the loan repayments from your regular income.
Understand what happens if the market drops
Before you borrow, map out the worst-case scenario. If the investment falls 30% and you have a £10,000 loan, you’re left with £7,000 in investments and a £10,000 debt. You’d need the investment to rise by over 40% just to break even — and you’d still be paying interest on the loan the whole time. The MoneyHelper guidance makes clear that you should only consider this strategy if you can afford to lose the entire investment and still repay the loan.
What’s changing in the near future
The UK’s capital gains tax annual exempt amount dropped from £6,000 to £3,000 in April 2024, and the dividend allowance fell from £1,000 to £500. These changes mean that more investors will be caught by tax on their investment returns, narrowing the margin between borrowing costs and net profit. If you’re planning to borrow to invest, you need to factor in these lower allowances — the tax-free buffer is now significantly smaller than it was just two years ago.
Frequently asked questions about borrowing to invest
Can I use a credit card to borrow for investment? ▾
Is the interest on a loan for investment tax-deductible? ▾
What happens if my investments fall below the loan value? ▾
Can I borrow to invest in an ISA? ▾
Does the £3,000 CGT allowance apply to borrowed investments? ▾
What’s the safest way to use leverage for investing? ▾
Borrowing to invest is a narrow bet, not a broad strategy
The conditions that make borrowing to invest work are specific: a low interest rate, a high expected return, a long time horizon, a tax-efficient account, and the ability to repay the loan even if the investment goes to zero. Most people who try this strategy don’t meet all five conditions simultaneously. The numbers from MoneyHelper make one thing clear — the margin between profit and loss is thin, and the risk of loss is real. The smartest move is to explore other ways to grow your money before taking on debt to invest.
Remember: this article is general information only. For advice on your specific situation, speak to a qualified professional.
If this was useful, you might also want to read How to plan for financial security in an unpredictable UK economy.
Sources and Further Reading
Is your rainy day fund really enough? — Build a cash buffer before you consider taking on debt for investments.
Don’t be fooled: debunking common UK financial myths — Separate fact from fiction when it comes to money strategies.
MoneyHelper (2024). Is borrowing to invest a smart move? 🔗
