Relief for Home Loan Interest - Rules & Guidelines

Introduction

This article sets out the rules, guidelines and procedures regarding interest relief on home loans. Tax relief is allowable on loan interest if the loan has been used for qualifying purposes. The relevant legislation is contained in Section 244 Taxes Consolidation Act 1997. The topics covered are as follows:

• Meaning of “qualifying purposes”
• Sole or main residence
• Two residences in regular use
• Residences under construction and purchase of sites
• Joint purchase of a residence in anticipation of marriage
• Job-related accommodation
• Mobile-homes, caravans etc.
• Meaning of purchase, repair development or improvement of a sole or main residence
• Evidence of purposes for which a loan is used
• Loans used partly for qualifying purposes and partly for non-qualifying purposes
• Re-mortgages and second mortgages
• Fines on mortgages
• Treatment of interest on joint accounts
• Joint accounts - mortgage interest paid to local authorities
• First time buyer relief
• Standard rating of interest.
• Bridging loan interest

Qualifying purposes

“Qualifying purposes” means the purchase, repair, development or improvement of the sole or main residence of:

• The claimant
• A former or separated spouse of the claimant
• A dependent relative of the claimant or his/her spouse in respect of whom the claimant is in receipt of the dependent relative allowance under Section 466(2)(a) or (b), TCA 1997. (If the residence is provided by the claimant, it must be provided free of rent or other consideration.)

A loan which is used solely to replace a loan used for qualifying purposes is regarded as used for qualifying purposes even if the new loan differs in type from the old loan (e.g. a mortgage replacing a term loan).

Sole or main residence

In general, the sole or main residence of any person will be the residence which is the person’s home for the greater part of the time and where friends and correspondents would expect to find him/her. The residence does not have to be owned by the person, for example, a parent’s residence may also be the sole or main residence of any of the children of the parent who commonly reside there. To qualify for relief, the residence must be in use as a sole or main residence. This condition is not interpreted in an overly strict manner and temporary periods of disuse do not result in a loss of relief provided that the residence is not used for any other purpose and it is the clear intention of the claimant to use the residence as his/her sole or main residence at the end of the period of disuse. Difficulties may arise in the following cases:

• Two different places of residence which are both used on a regular basis
• A residence under construction
• The joint purchase of a residence in anticipation of marriage
• Job-related accommodation
• Mobile homes, caravans and other moveable structures in use as a residence.

These items are covered in detail in the following paragraphs:

Two residences in regular use

In most cases where a person has two residences, it is possible to determine which is the sole or main residence on the basis of frequency of occupation, e.g. a holiday home used for short periods in the year compared to a residence used throughout the year. However, frequency of occupation alone is not the test and situations can arise where the question is not clear-cut, e.g. a house in one town which is owned and is used at weekends and holidays compared to digs or rented accommodation in another town which is the person’s place of employment. In determining which of two residences is a person’s sole or main residence, the following guidelines are followed:

• The fact that a greater period is spent in one residence does not necessarily preclude the other from being treated as the main residence. In particular, where the person has to use other accommodation by reason of his/her employment, the residence used at weekends and non-work periods would normally be regarded as the individual’s sole or main residence e.g. a commercial traveller or a person temporarily absent from home or a person obliged to find employment in another town.
• A residence which is owned and in respect of which mortgage interest etc. is paid would normally be accepted as the sole or main residence in preference to one which is rented where both are in regular use
• Where a single person has a separate residence, the parental home would not be accepted as the sole or main residence unless the circumstances are exceptional
• Except for the circumstances mentioned below in relation to residences under construction or purchased in anticipation of marriage, a claim that a particular residence is the main one would normally be admitted only if the residence is furnished and suitable for occupation, is in fact occupied (except for periods of temporary disuse) and is not used for any other purpose e.g. let.
• Where both residences are owned and one is used during holidays only, a claim that the holiday home is the main residence would be resisted.

If, on applying the above guidelines, it is not possible to determine which of two residences is a person’s sole or main residence because:

• Both residences are owned by the person
• He/she resides in both residences for significant periods on account of his/her office, employment, business interests or other requirements, and neither residence can be regarded as a holiday home
  and
• The Inspector and the person (or his accountant) have been unable to reach agreement on which residence is the sole or main residence,

then the person may be permitted to select by notice in writing which residence is to be regarded as his/her sole or main residence on the understanding that the selection will have effect for both interest relief and Capital Gains Tax purposes.

Residence under construction and purchase of sites

Where a residence is under construction, various payments may have to be made throughout the course of construction in respect of which money must be borrowed, e.g. on purchase of the site and at various stages of the construction. The taxpayer may seek relief in respect of the interest paid on the loans even though the residence is not in use as a sole or main residence and is not capable of such use. The problem may be further complicated by a claim in respect of bridging finance (see page 23). In dealing with such cases, the following guidelines are followed:

• Inspectors, as far as possible, establish that the residence when completed will become the sole or main residence of the taxpayer and any relief is given on the understanding that it will be withdrawn if the residence does not become the sole or main residence. In cases of hardship where it is clear that the taxpayer intended to use the residence as a sole or main residence but due to circumstances beyond his/her control is unable to do so e.g. loses his/her job or is transferred or is unable to sell the existing residence - the relief granted would not be withdrawn.
• No relief is given in respect of loans to purchase a site unless and until there is planning permission to construct a residence on the site
• In the case of a first-time house purchaser, the residence may be accepted as his/her sole or main residence with effect from the date of purchase of the site or, if later, the date planning permission for the construction of the residence is granted.

Where the taxpayer has an existing residence which he/she intends to dispose of and in respect of which he/she is paying mortgage interest etc., the twelve-month rules in relation to bridging interest will be relevant (see page 23). The taxpayer can only obtain relief for interest paid in respect of the first residence for a period of twelve months from the date he/she acquires the second residence. Depending on borrowings, it may or may not be to his/her advantage to claim that the second residence became his/her sole or main residence when the site was purchased. In such cases, the taxpayer may specify any date between the date of purchase of the site or, if later, the granting of planning permission and the date the second residence commences to be actually used by the taxpayer as being the date on which the second residence is to be treated as a sole or main residence of the taxpayer. Once that date is specified, the twelve-month period is be treated as commencing on that date. The taxpayer may pick the date most beneficial to his/her circumstances. In the absence of a specification, relief will not be granted until the second residence is in actual use as the sole or main residence of the taxpayer and the twelve-month period referred to above is treated as commencing at that time.

Joint purchase of residence in anticipation of marriage

It is common practice for couples to purchase a house on joint account in anticipation of their marriage. Until the marriage takes place, the house may be unoccupied or occupied by one of them only. In the former case, the house would not be the sole or main residence of either party and in the latter case, it would be the sole or main residence of the person in occupation only. In such cases, if:

• The house has been purchased in anticipation of marriage and will be used by the couple as their sole or main residence after marriage
• The loan account is in the joint names of the couple and each is jointly and severally liable for the interest charged
  and
• The house is unoccupied or is occupied by one of the parties concerned and is not occupied by any other person e.g. there are no friends or workmates occupying rooms in the house and contributing to the repayments or paying rent,
• relief will be allowed to each in accordance with the amount of interest actually paid on the basis that the house is the sole or main residence of both claimants. The claimant or claimants to relief not actually occupying the house are advised that the relief is granted on an administrative basis only and subject to withdrawal if the house does not become the sole or main residence of the claimant or claimants. In practice, however, relief will not be withdrawn in genuine cases if due to unforeseen circumstances the house does not become the sole or main residence of one or both of the claimants, e.g. if differences arise and the marriage does not take place and a settlement is made in relation to the house.

Job-related accommodation

Where a person occupies job-related accommodation provided by his employer and also has a private residence of his/her own, difficulties may arise in determining which is his/her main residence. In such cases if:

• The provisions of Section 118(3) TCA 1997, apply to the accommodation provided by the employer [i.e. non-application of benefit-in-kind provisions where employee is required to live on the premises to perform his/her duties]
  and
• The private residence owned by the person is used by that person as a residence and is not used for any other purpose e.g. it is not let for any part of the year, it will be accepted that the private residence is the main residence for the purposes of a claim for interest relief.

Mobile homes, caravans etc.

While mobile homes, caravans etc. are not specifically dealt with in legislation, such a residence can be a sole or main residence for tax purposes. The question is one of fact. In general, a mobile home, caravan etc. which would suit the requirements of a main residence would be one which:

• Is on a permanent site
• Has been immobilised by removal of wheels, by being jacked up, by being mounted on blocks or otherwise supported on fixed supports
• Is of a reasonable size in relation to the requirements of use as a permanent dwelling
• Has electricity and other services supplied to it.

Purchase, repair, development or improvement of a sole or main residence

Any expenditure on a sole or main residence other than expenditure on furniture, removable fittings e.g. light fittings, curtains, drapes and removable floor coverings may be accepted as being qualifying expenditure. Examples of qualifying expenditure are:

• Purchase of another person’s part-interest in the residence, e.g. where a residence is owned jointly by two persons and one buys out the other’s interest
• Legal and other fees incidental to the purchase or development of the residence
• Cost of extensions, purchase and/or construction of garages, garden sheds, greenhouses and swimming pools
• Cost of construction of driveways and paths, landscaping of gardens
• Cost of conversions, general maintenance and painting and decorating
• Cost of installing central or solar heating (including cost of gas or solid-fuel cookers in use as part of a central heating system), rewiring, new plumbing including bathroom suites etc.
• Cost of insulation, replacing windows and double glazing
• Cost of purchasing and installing burglar and fire alarms and other security devices
• Cost of installing damp courses and general treatment for damp, dry rot, woodworm and similar problems
• Cost of purchase and installation of bedroom and kitchen units which are affixed to and become part of the building
• Stamp Duty on the purchase of a residence
• Contributions to groups water schemes and sewage schemes
• Construction of tennis courts.

Evidence of the purposes for which a loan is used

Except in the case of a loan which is clearly related to the initial purchase of a sole or main residence, documentary evidence may be required to prove that a loan has been used for qualifying purposes.

The evidence may take the form of builders’ specifications, receipts, paid cheques etc. It is neither necessary nor, in many cases, practicable to require that evidence be produced for the entire proceeds of the loan. Similarly, the fact that some or all of the work has been carried out by the taxpayer is not a bar to claiming relief in respect of a loan applied in purchasing the materials with which the work is carried out e.g. a pre-fabricated garden shed, “do-it-yourself” presses and double glazing.

Loans used partly for qualifying purposes and partly for other purposes

Strictly, in order to qualify for tax relief a loan must be used entirely for qualifying purposes. If the loan is used partly for some other purpose no relief is due in respect of any portion of the interest paid. However, in practice Revenue will apportion interest in certain circumstances - including situations where the qualifying and non-qualifying amounts have been borrowed at different times - and will give relief for the interest attributable to the portion of a loan used for qualifying purposes.

Example 1

A 5 year term loan of ₤10,000 is taken out, ₤6,000 is used for qualifying purposes and ₤4,000 for other purposes. Relief is allowed in respect of 6/10ths of the interest each year.

Example 2

A 5 year term loan of ₤10,000 was taken out and the entire amount was used for qualifying purposes. In year 3, when the balance of the loan was ₤6,000, the loan was replaced by a new loan of ₤8,000 and repayment of the new loan of ₤8,000 is over four years. ₤1,000 of the further borrowings is used for qualifying purposes and the other ₤1,000 is used for other purposes. Relief is allowed in respect of:

i.e. 7/8ths of the interest paid each year on the new ₤8,000 loan.

Example 3

A 3 year term loan of ₤3,000 was taken out and the entire amount was used for non-qualifying purposes. In year 1, when the balance of the loan was ₤2,000, the loan was replaced by a new loan of ₤10,000 repayable over 5 years. All of the further borrowing, ₤8,000, is used for qualifying purposes. Relief may be allowed on:

i.e. 4/5ths of the interest paid each year on the new ₤10,000 loan.

Re-mortgages and second mortgages

The fact that a loan involves a re-mortgage or a second mortgage does not make it eligible for any special treatment for tax purposes. It is treated in the same manner as any other loan. Interest paid on a loan secured by a re-mortgage or a second mortgage on a sole or main residence strictly qualifies for relief only if the amount or additional amount borrowed is used for qualifying purposes. However, if the re-mortgage or second mortgage is used partly for qualifying purposes and partly for a purpose other than a qualifying purpose, apportionment of the interest paid may be made.

Example 1

A taxpayer had an original mortgage of ₤40,000 on a main residence. On 10 February 1998, the balance on the mortgage stood at ₤35,000. On that date, the residence was re-mortgaged for ₤60,000 and ₤15,000 of the additional ₤25,000 was used to purchase a car and ₤10,000 on replacement windows/central heating for the main residence. Relief for interest paid (subject to the usual limits/restrictions and standard rating, as appropriate) on the re-mortgage of ₤60,000 will be allowed to the extent of:

i.e. 3/4 throughout the term of the re-mortgage.

Example 2

A taxpayer had an original mortgage of ₤60,000 on a main residence. On 10 February 1996, the balance on the mortgage stood at ₤40,000. On that date, the residence was re-mortgaged for ₤50,000 and the additional ₤10,000 was used to purchase a car. No relief is due for interest on the additional ₤10,000 but relief for interest paid (subject to the usual limits/restrictions and standard rating, as appropriate) on the new mortgage of ₤50,000 is allowable to the extent of ₤40,000/₤50,000 (i.e. 4/5 ths) throughout the term of the re-mortgage.

The residence was subsequently re-mortgaged again for ₤70,000 at a time when the balance on the first re-mortgage of ₤50,000 stood at ₤35,000.

In order to determine the fraction of the interest on the second re-mortgage of ₤70,000 which qualifies or relief, the following steps are followed:

Step 1

Determine the proportion of the balance of ₤35,000 on the first re-mortgage which is attributable to the original mortgage.

This is

*(Balance of original mortgage)

Step 2

Determine what fraction of the second re-mortgage the ₤28,000 represents,

i.e.

Step 3

Allow 2/5ths of the interest paid on the second re-mortgage

Fines on mortgages

In certain circumstances, a building society may impose a fine of an additional amount of interest on the cancellation of a mortgage or on a re-mortgage. The amount of the fine is treated in the same manner as any other interest paid on the mortgage which gives rise to the fine and relief is allowed accordingly.

Treatment of Joint Accounts

General

Relief under Section 244 TCA 1997, is confined to interest actually paid by the claimant. In the case of joint accounts, where each of the account holders is jointly and severally liable for the payment of the interest, the normal procedure is to regard any interest paid as having been paid in equal proportion by each account holder.

If proof is given that the interest was paid in unequal proportions or was paid in its entirety by one person only, relief, where due, is given to each account holder in respect of the interest actually paid by him/her.

The degree of proof required will depend on the circumstances of each case. In a straightforward case where there is no obvious tax advantage to be gained from an unequal apportionment of the interest, the claim from the taxpayers may be sufficient. Similarly, where it is obvious from the income resources of the claimants that it would be reasonable to expect that the bulk of the interest could only be paid by one party, a claim to that effect would be accepted. However, if:

• One of the account holders is outside the tax net and is alleged to have paid a smaller proportion or none of the interest
  or
• One of the account holders is liable to tax at the higher rates and it is alleged that he/she paid a higher proportion or all of the interest
  or
• One of the account holders has reached or exceeded the ceiling for relief under Section 244 TCA 1997, and it is alleged that he/she has paid a smaller proportion or none of the interest
  or
• The interest is allegedly paid in such a manner as no reasonable person would be expected to pay it (e.g. the loan is used to purchase an asset for the equal use of two persons but one person is allegedly paying all or the bulk of the interest),
• an unequal apportionment of the interest will not be allowed without a thorough investigation of the facts. In particular, a copy of the loan agreement will be requested and a detailed explanation for any inconsistencies will be required.

Mortgage interest paid to local authorities

In cases where a local authority house is being purchased jointly by an elderly parent and one or more members of the family under a formal Transfer Order under Section 90, Housing Act 1966, the local authority issues the interest certificate in the names of all the joint purchasers.

Where any person named on the certificate is in receipt of an Old Age Pension from the Department of Social, Community and Family Affairs and has no other income and where the Inspector is satisfied that such a person has not, in fact, made any payment in respect of interest, the full amount of the interest may be allowed to the other person named on the certificate if there is only one or in equal proportions to each other person named if there is more than one.

First Time Buyer Relief

General

First time buyers are entitled (for a period of five years) to more favourable tax relief than is generally available on the payment of mortgage interest. Tax relief for these individuals is calculated without the percentage restriction or the ₤100/₤200 restriction.

The term “first time buyer” means an individual who has not previously been entitled to relief in respect of interest paid on loans used for the purchase, repair, development or improvement of an individual’s sole or main residence.

The “first time buyer” relief applies to an individual provided that the year of claim is one of the first five years for which relief falls to be given to that individual in respect of interest paid on qualifying loans.

In deciding whether or not the “first time buyer” relief is due for any year, the number of years for which interest relief falls to be granted must first be established - see Examples A and B.

Joint Loans

Where the parties to a joint loan are not married to each other, the question of whether one or other of the parties is a “first time buyer” is determined by reference to the facts applicable to each individual.

Accordingly, it is possible in the case of joint loans that one of the parties is a “first time buyer” and the other is not - see Example C.

Married Couples

Where a married couple are charged to tax on the basis of either Joint Assessment or Separate Assessment and either spouse has been granted relief in respect of a qualifying loan, the relief is treated as having been given equally to both spouses for the purposes of deciding whether or not the “first time buyer” relief is due - see Examples D and E.

Example A

In 1990/91, Martin purchased his first principal private residence financed by a mortgage. In 1991/92, he sold this house and emigrated. In 1995/96, Martin returned to Ireland and purchased another principal private residence financed by a mortgage. Martin qualifies for ‘first time buyer’ relief for:

• 1995/96 - as this is the third year of interest relief
• 1996/97 - as this is the fourth year of interest relief
• 1997/98 - as this is the fifth year of interest relief.

Example B

In 1990, Mary inherited her parents’ house. In 1993/94, she sold this house and purchased another principal private residence financed by a mortgage. Mary qualifies for the ‘first time buyer’ relief for all years 1993/94 to 1997/98 inclusive as she had not previously been entitled to relief on interest paid on qualifying loans.

Example C

In 1985, Joan purchased her principal private residence and she has been granted interest relief for all years to date in respect of the interest paid on the loans to purchase the property.In July 1993, Joan sold her principal private residence and acquired, jointly with Frank (who has never previously claimed relief in respect of a qualifying loan), another principal private residence.In calculating the relief due on the interest paid on the loan to acquire the new house, Joan is not a ‘first time buyer’ but Frank is. Accordingly, Frank qualifies for the ‘first time buyer’ relief for the years 1993/94 to 1997/98 inclusive but Joan does not.

Example D

In 1983, Peter purchased his principal private residence, financed by a mortgage in his sole name. He married Helen in 1985. Since marriage, the couple have elected to be taxed under joint assessment and the relief granted in respect of the interest paid on the home loan was calculated by reference to the general ceilings applicable to a married couple. In 1996/97 Peter sold the house and, jointly with his wife Helen, purchased another principal private residence financed by a loan in their joint names. For the purposes of calculating relief due on interest paid for 1996/97 et seq., Helen does not qualify for “first time buyer” relief for any year.

Similarly if the couple had separated in 1996/97 and Helen had purchased a house in that year, she would not be a “first time buyer”. She is treated, for this purpose, as having been granted interest relief for each year for which her husband was granted relief and ‘first time buyer’ relief would not apply for any year.

Example E

Tom and Anne married in 1993/94 and purchased their first principal private residence in that year financed by a mortgage. In 1994/95, the couple separated, sold the house and each then purchased a principal private residence. Both Tom and Anne qualify for the ‘first time buyer’ relief in 1995/96, 1996/97 and 1997/98.

Standard Rating of Interest

Standard rating of home loan interest was phased in with effect from 1994/95 as follows:

The part (or full amount for 1997/98 et seq.) of the allowable interest which is standard rated is no longer deductible in computing total income (other than for exemption and marginal relief purposes). Relief for this amount at the standard rate is deducted in computing income tax payable for the year.