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's 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's 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's 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's 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
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's 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's and his wife's 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's arguments.