Tax Relief on Qualifying Home Loans / BIK on Preferential Loans

1. Background

Under Section 244 Taxes Consolidation Act 1997, an individual may (subject to the statutory 4 year time limit for claiming repayment of tax) claim tax relief in respect of the interest paid on a loan used in the purchase, repair, development or improvement of a residence which is used as his or her sole or main residence (or used as the sole or main residence of a former spouse or dependant relative).

Section 3 Finance Act 2009 –

1. amended Section 244 TCA 1997 so that, as regards interest paid on or after 1 May 2009, such interest will qualify for tax relief only where it is payable within the first 7 tax years of the life of that loan;
2. has a ‘knock on’ consequence to the specified rate of interest used to calculate the taxable benefit in kind arising from the use of a preferential loan to which Section 122 TCA applies.

The purpose of this article is to clarify certain matters relating to both (a) and (b).

2. Interest paid on two separate qualifying loans where each such loan is advanced at different times

The ‘7 tax year’ rule will apply separately to the interest paid on each loan.

Example

Ms. Brown, a first time buyer, obtained a qualifying loan on 1st June 2005 with a second qualifying loan advanced on 10th August 2007.

The interest paid on the first loan in each of the 7 tax years 2005 to 2011 inclusive qualifies for tax relief (at the first time buyer rate) in respect of those tax years only (i.e. no relief is due for 2012 onwards).

The interest paid on the second loan in each of the 7 tax years 2007 to 2013 inclusive qualifies for tax relief in respect of those tax years only at the following rates -

• Tax years 2007 to 2011 @ the first timer buyer rate;
• Tax years 2012 and 2013 @ the non-first time buyer rate.

3. Interest paid on a loan that has been ‘topped up’

The ‘7 tax year’ rule will apply separately to both the interest paid on the original advance and the interest paid on the ‘top up’ amount.

Example

Mr. Murphy, a non-first time buyer, obtained a qualifying loan advanced on 1st June 2006. On 10th July 2008, he obtained a second advance to build an extension to his home. Both the balance outstanding on the original loan and the ‘top-up’ were amalgamated into one loan.

The interest paid that relates to the original loan in each of the 7 tax years 2006 to 2012 inclusive qualifies for tax relief in respect of those tax years only.

The interest paid on the ‘top-up’ element in each of the 7 tax years 2008 to 2014 inclusive qualifies for tax relief in respect of those tax years only.

4. Interaction of the ‘7 tax year’ time limit on qualifying home loan interest with the “specified rate” that applies in benefit-in-kind provisions in relation to preferential loans (Section 122 TCA 1997)

The specified rate of interest used to calculate the taxable benefit arising from the use of a preferential loan to which Section 122 TCA applies is -

1. 5% where the interest on the preferential loan qualifies for tax relief under Section 244 TCA 1997; or
2. 12.5% where the interest payable does not qualify for tax relief under Section 244 TCA 1997.

However, arising from Section 3 Finance Act 2009, where, after 7 tax years, the interest payable on a home loan no longer qualifies for tax relief under Section 244, the specified rate of interest for benefit-in-kind purposes moves from 5% to 12.5%. Revenue accepts that this is an unintended ‘knock on’ effect of Section 3 and is prepared to accept that the specified rate of interest of 5% may continue to apply in such cases.