Father wanting to invest in my Buy to let property - Tax implications?

Yes I think your assumption is correct. If the loan to your property rentals business is to finance a purchase of a property or capital enhancements to a property then the interest on it should be deductible, and it shouldn't matter whether the loan is secured on the property (although the lender may prefer that it is). The logic should extend to a loan used to re-finance an old loan otherwise people who borrowed money to finance a BTL purchase could never re-mortgage.

Of course, to ensure it's fully deductible you should make sure that you're not withdrawing some of it for personal spending in excess of your 'capital account' within the business i.e. going 'overdrawn' on the capital account. If the property cost plus any other business assets less liabilities including the remaining mortgage gave your business a 'balance sheet', at cost, of £100k, you couldn't borrow £120k from your father and claim all its interest as deductible.

You ought to put loan documentation in place with your father, just like you would with an unrelated third party. Under what circumstances will the loan principal and the tranches of interest be repaid? Is there a penalty if you don't pay the interest on time? Is the loan secured in any way? If bank base rates go up to 8% is your father still happy to be paid only 3.5% until whenever you exit the property or whenever the mortgage term finishes? If you decide to sell the property at number 3, High Street to buy another one at number 7 High Street, do you have to pay off the loan with the exit proceeds and re-borrow it again on new terms agreed at the time?

If you don't have any loan terms and it's just a gentleman's agreement, then you could be in financial difficulty if father passes away and the executor of his estate knows he lent you money and wants to call it in, particularly if you're not in a position to re-finance instantly with a bank at the time. You should think about these things even if he doesn't have a spouse or partner or other children and you expect to be the only likely beneficiary. What if. Basically all the things that he or you would want documented if he wasn't related to you.

In going through this thought process it should be pretty easy to prove a tie to the property business and the specific property itself because you can literally write into the agreement the fact that he is lending you £x purely to support the refinance of property x, and that it needs to be repaid if sold, and any other comments about how it is wholly and exclusively for the use of the property business to support its capital investment in property x. Also you should probably ensure that you receive that money into the same business bank account from which you make your huge mortgage overpayment of the same amount a few days later and keep copies of the bank statement and mortgage statement safe. Taken together all that would seem to support the fact that there's a tie between that loan taken from the father and the investment on your balance sheet.

If you were thinking of using your father's generosity to borrow £60k and only pay off £50k of loan right now, better to do the documentation and transfers at £50k and then a separate (documented or not) deal on the side for £10k. That would keep the documentation clean and tidy for the £50k you're looking to claim interest relief on.

The above sounds perfectly reasonable and legitimate to me. However, I should caveat it with the fact that I'm not a tax expert and have never been subject to an HMRC tax inspection in relation to business loans (nor do I own a lettings business or any other kind of business). I just get bored on long train journeys and read MSE forums if I didn't bring a good book or my headphones