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HMRC internal manual

Property Income Manual

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HM Revenue & Customs
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Deductions: interest: Property used for mixed purposes - years up to 1999-2000

Outline

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

It is increasingly common for properties to be used for a mixture of business and residential purposes. If separate loans are taken out to acquire the business and the residential parts of the property, the interest for the residential part qualifies for mortgage interest relief, while interest on the business part can be allowed as a deduction in computing profits.

But strictly the position is different for a single loan. If mortgage interest relief is claimed, no deduction can be given for the interest in computing the profits of a business. Or if a deduction is claimed in computing profits, mortgage interest relief is not available.

In some circumstances, ESC/A89 allows a single loan to be treated as two separate loans, so that mortgage interest relief may be claimed for the part relating to the residential use of the property and a deduction made in computing profits for the part relating to the business use.

The concession applies from 1995-96 onwards.

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Interest: property used for both residential & business purposes: ESC/A89

Where a loan is used to buy a property that is used both as the taxpayer’s home and for business purposes they can, strictly, have only one sort of relief. If they receive mortgage interest relief on the interest paid (whether through the MIRAS arrangements or otherwise) no interest on that loan is allowable as a deduction in computing the profits or losses of the rental business. Correspondingly, if interest is deducted in computing the profits or losses of the rental business, they can’t have mortgage interest relief.

By concession, however, a single loan may be treated as two separate loans so that they may:

  • have mortgage interest relief, through the MIRAS arrangements or outside MIRAS as appropriate, for the part relating to the residential use of the property, and
  • deduct interest in computing the profits or losses of the rental business for the part relating to the business use.

This enables taxpayers to get tax relief at their highest tax rate on the full amount of the interest on the business part of the loan, (ESC/A89).

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The strict position

If a loan is used to buy a property used for mixed residential and business purposes and mortgage interest relief is claimed as an IT reduction (ICTA88/S353) or through MIRAS (ICTA88/S369), no interest on that loan is allowable as a deduction in computing the profit or loss of a business assessable under Schedule A or Case I or II of Schedule D (ICTA88/S368 and ICTA88/S369 (3) respectively).

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The concession

If the taxpayer asks for ESC/A89 to be applied, the loan may be treated as follows:

  • Where a part of a property, which is the borrowers only or main residence, is used exclusively for business purposes the loan in question may be apportioned on the basis of the proportion of the property so used. Mortgage interest relief may then be claimed for the interest on the part of the loan attributable to residential use and a deduction may be allowed for the interest on the part of the loan attributable to business use.
  • Where a part of a property, which is the borrower’s only or main residence, is only sometimes used for business purposes (but for a significant amount of time and then exclusively) the loan in question may be apportioned on any reasonable basis that takes account of both the proportion of the property so used and the duration of such use. Mortgage interest relief may then be claimed for the interest on the part of the loan attributable to residential use and a deduction may be allowed for the interest on the part of the loan attributable to business use.

If the loan is within MIRAS and the residential part is less than £30,000, some or all of the business part will also have been relieved through MIRAS. Only the additional relief over and above that received through MIRAS is treated as a business deduction.

TB18 carried an article about the operation of ESC/A89, which included detailed examples showing the way the concession works.