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Turn over a new relief

The eventual disappearance of mortgage interest relief, having been on the

cards for so long, caused nothing like the uproar that might have been

expected had it been removed at a stroke.

Its removal had been discounted by the housebuying public for a long

while. This acceptance can be traced back to the introduction of

limitations on the rate of tax relief and the amount of loan that

qualified. Add this to a relatively long period of low interest rates and

the conditions could not have been better for a trouble-free removal.

No doubt, the tactic of announcing a detrimental change in advance of

actually making it will be used again in future.

Taxpayers and planners should remember, however, that the abolition of

relief on mortgage interest does not mean relief cannot be claimed for

other qualifying interest payments. One valuable relief is that in respect

of the payment of interest on a loan where the purpose is to lend or

contribute money to a partnership or to lend to or acquire shares in a

close trading company.

For many years, individuals involved in such busi-nesses have had open to

them unlimited tax relief on such borrowing. The relief can be justified as

encouraging investment in trading businesses.

For those with a credit balance loan account or capital account, it has

been stated on many occasions that they have the opportunity to secure

interest relief on borrowing that would not otherwise have qualified. This,

of course, is not strictly true as relief is only available if the purpose

of the borrowing satisfies the conditions laid down.

However, they may be forgiven for thinking that, if the funds owed by the

business were released and used to repay non-qualifying borrowing, say, a

mortgage loan, then, if fresh borrowing took place to reinstate the amount

released in repayment of the credit balance, the interest payable on the

new loan would be deductible if the purpose were qualifying, that is, the

amount borrowed and lent to the partnership was used wholly for the

purposes of its trade, profession or vocation or the amount lent to the

business was used wholly and exclusively for the purposes of its trade.

Properly carried out with no pre-ordination, this should be the case.

However, anybody planning on carrying out such transactions would be well

advised to take heed of s787(1) ICTA 1988. This provides that “relief shall

not be given to any person under any provision of the tax acts in respect

of any payment of interest if a scheme has been effected or arrangements

have been made (whether before or after the time when the payment is made)

such that the sole or main benefit that might be expected to accrue to that

person from the transaction under which the interest is paid was the

obtaining of a reduction in tax liability by means of any such relief”.

S787 has always been quoted by (rightly) cautious planners when

considering any arrangements. The recent case of Lancaster v Inland Revenue

Commissioners was one where the operation of s787, together with the

relieving provisions of s353 and s362(1)(b), was of central importance.

The senior partner in a firm of chartered accountants had a credit balance

with the firm and, with the clearly expressed purpose of carrying out

inheritance tax planning, drew a £30,000 cheque on the firm&#39s bank

account, debited to his capital account and made payable to his wife. The

cheque was credited to their joint account.

On the same day, the partner&#39s wife drew a £30,000cheque on the joint

account payable to the firm. There was no documentary evidence related to

either payment, so it was not clear why the partner&#39s wife had made a

payment to the firm. It was contended, in the case, that it was a loan but

there was nothing to say who the loan was to and what rate of interest, if

any, was payable.

The senior partner claimed relief in respect of £3,000 a year as

interest claimed to have been paid by him to his wife, on one occasion by

way of payment for his wife&#39s holiday. The contention was that the

£30,000 paid from the joint account to the firm was a loan by the

senior partner, he having borrowed the £30,000 from his wife and thus

become liable to make the interest payments. The claim was refused on the

grounds that:

The taxpayer failed to show he contributed money to the partnership to be

used wholly for the purposes of its trade, profession or vocation in terms

of s362(1)(b) since the only purpose served by the credit of £30,000

to the firm&#39s current account was to cover the debt of £30,000 which

the taxpayer had withdrawn as the initial step in the scheme for

arrangements which he had put in place to claim tax relief.

Even if a liability to pay interest existed, which the Revenue did not

accept, relief was precluded by s787 of ICTA 1988 since the sole or, at

least, the main benefit which might have been expected was to obtain a

reduction of the taxpayer&#39s and his wife&#39s liability to income tax.

The taxpayer appealed. Under s787, it was held that relief in respect of

any payment of interest was precluded if a scheme had been effected or

arrangements had been made such that the sole or main benefit that might be

expected to accrue to that person was the obtaining of a reduction in tax

liability by means of any such relief.

There was no doubt that the scheme in question had been effected and

arranged for this sole purpose.

In any event, the circumstances of the transaction were such that it did

not fail to be regarded as a loan to buy into a partnership such that

interest on it was eligible for relief pursuant to s362, since the true net

result of the circular transaction was that no money was contributed or

advanced to the partnership which it did not already have.

I will conclude next week by explaining the Revenue&#39s arguments.


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