§ Mr. Robert Sheldon
I beg to move amendment No. 6, in page 3, line 13, leave out from 'above', to the end of line 16.
§ The Second Deputy Chairman (Mr. Paul Dean)
With this it would be convenient for the Committee to take amendment No. 7, in line 28, leave out sub-paragraph (b).
§ Mr. Sheldon
We now come to anti-avoidance measures concerned with mortgage interest relief. It is a pity that we did not have a better opportunity to discuss these issues in the way in which we normally discuss all such technical details—that is, upstairs in Committee—but we understand the reasons for that.
The amendments concern the question of a director getting an interest-free loan because of his employment. Such a person buying a house or land—or operating under certain other qualifications by which he can obtain relief—has one interest-free loan and tops that up by getting another loan, this time bearing interest. With the limit going up to £30,000, it makes more sense for him to have not only his original interest-free loan provided by the company for which he works—getting it because of his employment—but to get another one that is interest-bearing. Mortgage relief under the provisions we are 827 discussing will cover the interest-bearing loan first and then, and only then, go on to the interest-free element of the loan.
What will happen if. instead of an interest-free loan, there are two rates of interest? In the one instance we have had complete protection of the revenue in that a loan was provided at a rate of interest that represented a benefit for the director. How will it apply where there are two rates of interest?
It will be seen that the amendments cover land, caravans and houseboats. We included caravans and houseboats in the extended legislation for mortgage relief some years ago. I am not sure how it will fit in with two mortgages— I should have thought it rare to get two different mortgages on, say, a houseboat—and perhaps the Financial Secretary will enlighten us on that. Do those provisions appear purely as precautionary matters, or does the right hon. Gentleman have any cases in mind? If so, I should be delighted to hear them because some interesting consequences might arise. We are all aware of the nature of avoidance in certain areas. I should be surprised if it applied here, but I await the right hon. Gentleman's reply.
§ Mr. Ridley
The clause seeks to deal with a drafting defect in the law whereby it has been possible for someone to take out both a £25,000 interest-bearing mortgage and at the same time to have an interest-free loan from his employer while not being subject to benefit-in-kind taxation on that loan. That means that the individual is able to achieve the effect of having two wallops of mortgage interest relief. That is something that the Government believe to be wrong, and the purpose of the clause is to restrict the £30,000 mortgage interest relief, as it will be now, to one go for each individual. The technical defect to which I have referred has been exploited to some extent and we wish to stop it.
What happens if there is not a zero-rate of interest on the employer's loan but a cheap rate of interest or a minimal rate of interest? Under the law as it stands, that would not enable the borrower to achieve the effect of having a loan from his employer and an interest-bearing loan, both being relieved, as it were, of the obligation to pay tax. The loophole arises only if the loan from the employer is interest-free.
I agree that there is some difficulty in understanding the clause, which is highly technical. The amendments relate to the part of the clause that deals with bridging finance. From the beginning of mortgage interest relief one was allowed, hitherto, to have £25,000 for the purpose of buying one's only or main residence. If an individual sets out to sell that house and to buy another house, and by misfortune has to buy the new house without being able to sell the old house—a trap which many fall into by bad luck more often than bad management—he is able to take out another loan of £25,000 and obtain interest relief on it for one year or such longer period as the Revenue may agree is reasonable having regard to the circumstances. That will cover him for the period while the first house is being sold.
In designing the clause it was necessary to take account of the possibility that there would be bridging loans to be taken care of, and we did not want to disallow the interest 828 on the bridging loan, whether it is interest-bearing from a building society or bank or interest-free and not to be charged to benefit-in-kind legislation from an employer.
This is a common problem because with greater industrial mobility many middle managers are required to move home. They have to find another house, buy it and move as quickly as they can. This means that employers are more and more inclined to extend to them a bridging loan to help them buy a new house. These loans are usually interest-free. We do not want to catch those who are in that position in this proposed legislation and that is the purpose of the two sections that the Opposition seek to amend.
One of the amendments deals with a situation in which there is both an interest-bearing loan and one interest-free loan while the other is directed to a situation in which there are two or more interest-free loans. Either way, the amendments achieve the same objective—I am sure that this is by mistake—of disallowing bridging loans from being exempted from the £30,000 mortgage interest relief.
I hope that that explanation, which I have offered in the simplest language that I can, is not a travesty of the complexity of the proposed legislation. I hope that it is intelligible. The right hon. Member for Ashton-under-Lyne (Mr. Sheldon) asked how one could have a £60,000 houseboat. It is a question that I am unable to answer completely although I suppose that it is possible to have a bridging loan on a houseboat. However, it might be easier to move the houseboat and not bother with a bridging loan.
§ Mr. Sheldon
I am grateful for the explanation offered by the Financial Secretary. I beg to ask leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Clause 4 ordered to stand part of the Bill.