HM Revenue & Customs has launched a consultation on the withdrawal of mortgage interest relief on home income plans, which were loans used to purchase life annuities, taken out by people aged 65 or over before 1999.
Home income plans were a form of equity release popular in the 1990s, with the product’s acronym part of equity release trade body the Equity Release Council’s old name – the Safe Home Income Plans group.
A home income plan is where the borrower takes out a loan secured against their home and uses the sum released to buy an annuity.
Part of the income pays the interest on the loan, usually at a fixed rate, and the remainder provides the borrower with an income for life.
The loan is repaid on the happening of a ‘determinable event’, including death or moving into permanent long-term care.
Although the schemes were popular in the past, the removal of mortgage interest relief at source tax relief for new borrowers after March 1999 made them less favourable for homeowners under the age of 80.
However, existing home income plan borrowers continued to benefit from the relief after the cut off point for the remainder of the loan period. The Government is now proposing to withdraw the mortgage interest relief for these existing home income plan borrowers from April 2019.
HMRC estimates there were just 15,000 loans to people that would qualify for this relief in February 2000. It currently estimates that fewer than 1,000 individuals are benefiting from the scheme, by around £400 a year.
For example, an interest rate of 5.9 per cent is worth around £354 a year, or £6.80 a week, whereas a 7.6 per cent loan rate is worth about £456 a year, or £8.76 a week.
The consultation closes on 30 September.
In the Budget this year the Government announced it would consult on the impact of the future of withdrawal of the relief on these loans.
MIRAS was introduced in 1969 to give relief on loans for the purchase or improvement of land. These categories of relief were subsequently expanded to include the relief for interest on loans to purchase lief annuities where the annuitants were over 65.
The relief was originally for the interest on the full amount of the loan, but was later restricted to the interest on £30,000 of the loan.
Before 1983, the allowable interest was deducted from taxable income but in April 1983 the mortgage interest relief at source scheme was introduced, under which the borrower pays the lender the interest less the tax relief.
Currently, the borrower is is entitled to deduct 23 per cent from payments of interest qualifying for relief.