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HMRC internal manual

Property Income Manual

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HM Revenue & Customs
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Deductions: Interest: Mortgage interest - years up to 1999-2000

Outline

These instructions apply for years up to and including 1999-2000. For 2000-01 and later see PIM2105.

This paragraph tells you what happens when interest on a let property qualifies for mortgage interest relief.

Where the property is partly used for business purposes (including letting) and partly for residential purposes see PIM2130.

A borrower who is eligible for mortgage interest relief may let his main residence. This most commonly happens where he or she is temporarily absent by reason of employment (see RE346) or is living in job related accommodation (RE347).

Each year, the taxpayer may choose to have the interest relieved:

  • as an IT Schedule A deduction, or
  • by way of mortgage interest relief (through MIRAS if the loan qualifies, or as an IT reduction).

Allow mortgage interest relief unless the taxpayer elects for a Schedule A deduction instead.

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Interest payable - letting own home: ESC/A27

Where a taxpayer pays interest on a loan to buy their home, which is also let, the interest may be eligible for:

  • mortgage interest relief (which is available for interest on a loan to buy a home whether or not a rental business is carried on),

and

  • a deduction in computing the profits or losses of the rental business.

The taxpayer can’t have both forms of relief, but they may choose each year whichever form of relief is better for them.

The most common circumstances in which a home might be let are:

  • where the taxpayer lives in job-related accommodation and buys another property which they use as their home from time to time or which is intended to be used as their home sometime in the future, (ICTA88/S356), or
  • where the taxpayer is temporarily absent from their home because of their job, (ESC/A27).

Mortgage interest relief is:

  • available for interest paid on loans of up to £30,000; if the loan is more than £30,000 relief is given only for interest on the first £30,000; for example, if the loan is £60,000, half the interest qualifies for relief,
  • given at a fixed rate on qualifying interest. In March 1999 the rate was 10% on qualifying interest, for example, if the interest paid on a loan of £20,000 is £1,600 the relief is £160.

Mortgage interest relief under the MIRAS arrangements is usually obtained by paying less than the full amount of interest due (see next paragraph). The lender then claims the balance from the Revenue. But in some cases the relief may be given in other ways (see below).

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Loan eligible for MIRAS

Where a loan is eligible for relief under the MIRAS arrangements, relief must be given under MIRAS unless the borrower elects to deduct the interest in computing the profits or losses of the rental business, (ICTA88/S375A (1)).

There is no special form for the election but it must be made in writing. The taxpayer should tell their tax office:

  • that they are carrying on, or propose to carry on, a rental business,
  • that interest on the loan is to be deducted in computing the profits or losses of the rental business, and
  • the date from which they want the MIRAS arrangements to cease to apply.

The tax office will then tell the lender that the loan should be removed from MIRAS and the date on which this should be done. Where possible that will be the date the taxpayer has specified in their election but it may be later. If so we will need to recover from the taxpayer any extra relief they receive by making an assessment, (ICTA88/S375A (3) & (4)).

Once an election has been made it can’t be withdrawn and, strictly, the loan must stay outside the MIRAS arrangements until the rental business ceases or, in the case of a proposed business, the proposal to carry it on is abandoned, (ICTA88/S375A (2)(b), and (6)). But the taxpayer may still choose each year whether to claim mortgage interest relief outside MIRAS or to deduct the interest in computing the profits or losses of the rental business.

Where the taxpayer has made an election and they let more than one property, the loan to buy their home will not be eligible for relief under the MIRAS arrangements until the whole rental business ceases. In practice, however, provided it is otherwise eligible, any loan to buy the home may be put back into the MIRAS arrangements when the letting of the home ceases, or the proposal to let it is abandoned.

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Time limit for making an election to opt out of MIRAS

The election to opt out of MIRAS must be made within 22 months of the end of the tax year in which it is first to have effect, (ICTA88/S375A (2)(a)). There is no particular form for an election, but it must be in writing. If the taxpayer submits a return of the Schedule A business profits, within the time limit, showing a deduction for the interest, you may treat that as an election.

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Late elections

Refer all late elections to Savings, Pensions, Share Schemes (MIRAS), Fitzroy House, PO Box 46, Nottingham NG2 1BD, together with full details of any mitigating circumstances.

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Loans outside MIRAS

If the taxpayer does not elect to deduct the interest in computing the Schedule A business profits, allow relief as appropriate under:

  • ICTA88/S355 (1) (main residence), or
  • ICTA88/S356 (job related accommodation).

In either case, allow relief as an IT reduction, restricted to interest on the qualifying maximum of £30,000, at the applicable percentage - 15% for 1995-96.

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Joint borrowers

For loans not eligible for relief under MIRAS each borrower can choose each year whether to:

  • claim mortgage interest relief, or
  • make a deduction in computing the profits of the Schedule A business.

For loans eligible for relief under MIRAS an election by any one borrower will require the whole loan to be taken out of MIRAS. Any borrower who does not make an election should be given relief as an IT reduction in his or her code number or assessment. If the borrower is a non-taxpayer, submit the papers to Savings, Pensions, Share Schemes (MIRAS), Fitzroy House, PO Box 46, Nottingham NG2 1BD.