As regards the withdrawal of funds "from your property letting business" it is not for HMRC Inspectors to tell you what you can do with your drawings from your business.
If for example you decide to finance your start - up property letting business ( note this would be a business but not a trading business) by the introduction of a property worth £300K then the opening balance sheet of the business would be
Creditors - Capital Account of the Proprietor £300K Assets - Property - £300K
As time goes on the rental profits (i.e. rental income less revenue expenses) would be added to your capital account so assuming no other matters end of year 1 where you drew out £2,500 for yourself over the year might be
Liabilities
Creditors - Proprietors Capital account b/f 300,000
Add Profit (say) 10,000
Less Drawn 2,500
Net Capital Account 307,500
Assets
Property 300,000
Cash at Bank 7,500
Net Assets 307,500
So nobody would have any problem with that and equally nobody can have any problem if you decide that in running your business you are going to make it pay for itself by for example taking out a loan to either wholly or partly pay for the property that you provide to the business.
In the latter situation the position might be represented at the end of year one when you take out a loan of £200,000 during the year on which interest paid is say 6,000 for the year as follows:-
Liabilities
Creditors - Proprietors Capital account b/f 300,000
Add Profit (say) 4,000 (the previous profit of £10,000 would be reduced by £6,000 interest)
Less Drawn 202,500
Net Capital Account 101,500
Third Party Loan 200,000
Net Liabilities 301,500
Assets
Property 300,000
Cash at Bank 1,500 ( interest of £6,000 would reduce the bank balance compared to previous example)
Net Assets 301,500
So again nobody can have any problems with that and the taxable rental profits have also been reduced by £6,000.
I agree that the HMRC Inspector is wrong and he should be referred to his HMRC Revenue Guidance manuals where he will find and experience some learning to your mutual advantages ( you'll get the tax relief for the interest you're entitled to and he'll correct his lack of training and knowledge).See the following link
http://www.hmrc.gov.uk/manuals/bimmanual/BIM45700.htm
If you get any difficulties always pleased to help clients with reasonable fees anywhere in the UK