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The interest on certain loans is tax deductible. There are broadly three purposes of loan:
Purchase of main residence.
Purchase of property to be let.
Most home loans are within the MIRAS scheme (Mortgage Interest Relief At Source). This means that the tax relief (what's left of it!) is given at source. No deduction is given for MIRAS loans.
If the loan is not in MIRAS, then rate restricted relief is available for the interest on up to £30,000 of the loan. If the loan is shared, the £30,000 limit is reduced proportionately. The rate for relief if 15% for 1996-97 and 1997-98, 10% for 1998-99 and 1999-2000 and is abolished from 2000-01 onwards.
The interest on loans on let property is allowed in full as an expense of that property. Therefore no separate deduction is given in the main tax computation. The interest may cause a loss to arise for the property.
These loans should not be under MIRAS. However, there are cases that break the rules. (The problem does not apply to 2000-01 because MIRAS has been abolished.) Typically, this happens when a person buys a new home and retains the original for letting. The lender should take the interest payments out of MIRAS but often fails to do so. To deal with let property loans under MIRAS, enter the gross amount of the loan as a let property expense and the tax retained under MIRAS as tax refunded by the Tax Office (box 17.1 on the 1999-2000 tax return).
These loans are fully tax deductible as gross deductions in the main tax computation. They should never be under MIRAS. In the extremely unlikely event that MIRAS has been applied, enter the tax retained as tax refunded by the Tax Office (box 20.1 on the 2000-01 and later returns, box 17.1 on earlier year's returns).
