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Residential Mortgage Interest Relief Restriction: The Unwelcome Gift that Just Keeps on Giving
24/11/2015, by Lee Sharpe, Tax Articles - Property Taxation
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TW Ed warns that people who have borrowed from their companies etc. to invest in residential property may be in for a shock.

Yesterday, I posted an old e-mail relating to the withdrawal of interest relief for residential property businesses – or, as I like to call it, “death by four cuts”.

With one eye on the screen and another counting down to my favourite Chancellor’s third Budget of the year, (or is that my third-favourite Chancellor’s “Budget of the Year”..?), I thought I should throw another impending problem into the mix.

Readers may be aware of a relatively obscure relief in the “beneficial loans” legislation, which effectively overlooks an employee’s overdrawn loan account where the funds have been applied for a qualifying purpose. No, I don’t really think it’s that obscure, either.

ITEPA 2003 s 178 says:

“A loan is not a taxable cheap loan in relation to a particular tax year if, assuming interest is paid on the loan for that year (whether or not it is in fact paid), the whole of that interest-...

...

(d)[ ... would be deductible in computing the borrower's profits from a Property Income business (income from land in the UK) carried on by the borrower.]” (I paraphrase: time is short. But not so short that I fail to notice that the notion of free movement of capital, people and, er, love has not yet caught on in a big way. Perhaps, on a moment’s reflection, the draftsman is right to stick to his guns).

The property income legislation at ITTOIA Part 3 mentions interest relief only indirectly.

Interest relief is deductible for a property business because ITTOIA 2005 s 272 says that trading income rules are to be applied to property businesses, subject to some adjustments.

The basis for allowing a claim for loan interest relief in a trading business is simply ITTOIA 2005 s 34 – the old “wholly and exclusively” rule. There are specific rules specifically permitting interest deductions from personal incomes in other scenarios – buying an interest in a close company, or equipment to be used in one’s employment, for instance – but these ‘special reliefs’ are not relevant to a claim for a trading deduction. (Ah, for the days when all were simply charges on income...)

So, overdrawn loan accounts applied to fund the personal acquisition of residential lettings will avoid a beneficial interest charge under ITEPA 2003 Part 3 Chapter 7 by virtue of s 178 (d), so long as nobody adds something to the property income legislation to manoeuvre it away from simply following trading rules...

Ah.

Fresh from Royal Assent, the Summer Budget’s new ITTOIA 2005 s272A (4) says:

“In calculating the profits of a property business for income tax purposes for the tax year 2020-21 or any subsequent tax year, no deduction is allowed for costs of a dwelling-related loan.” (My emphasis)

In prior subsections, the deduction is allowed but restricted. But by 2020/21, any deduction is denied.

At EIM26135, HMRC says:

"If only part of the interest qualifies for relief or deduction, the loan is not exempt. The cash equivalent of the loan (see EIM26200) is calculated without reference to any relief or deduction due. The employee claims any partial relief due under Section 353, or makes the appropriate deduction against Trading or Property Income, as a separate matter. See example 2 at EIM26130."

Looking on the bright side, the current official rate is not huge, and is broadly competitive. But it will mean a cost for the employee/investor, and also Class1A NIC for the company/employer. I am not sure if this was intended by the legislation but I suspect that it will lie well with HMT’s / HMRC’s overall aspirations which I perceive to be cooling the BTL market and raising revenue. 

About The Author

Lee is TaxationWeb's Articles & News Editor and writes for TaxationWeb. He is a Chartered Tax Adviser with experience of advising individuals and owner-managed businesses over a broad spectrum of tax matters.
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