Mortgage Interest Relief (Hansard, 17 December 1981)

§ Mr. Ridley

My predecessor announced on 23 January—[Vol. 997, c.596–7]—that my right hon. and learned Friend the Chancellor of the Exchequer was asking the Inland Revenue to study, together with the main lending bodies, how the arrangements for giving tax relief on mortgage interest might be altered to make them more efficient. He made it clear, and I confirm now, that the Government have no intention of restricting the amount of relief to which taxpayers are entitled.

The Inland Revenue have discussed the arrangement with representatives of the building societies, banks and insurance companies. They have also consulted representatives of the local authorities and other lenders. I would like to record the Government's appreciation of the help and advice given by all those who have contributed to this review.

The present arrangements for giving mortgage interest relief in PAYE codings and tax assessments worked reasonably well in the past but with interest rates changing more often it has become increasingly difficult to ensure that borrowers are given the right amount of relief. Code numbers need frequent amendment and even then tax is too often overpaid or underpaid. The study has confirmed that it would be much better if basic rate tax relief were given at source by deduction from most payments of mortgage interest. Giving relief in this way would simplify the tax system. In the majority of cases the right amount of relief would be given without further adjustment and new borrowers would get their relief without delay. It would also make possible a saving of about 1,000 staff in the Inland Revenue by 1984, with the prospect of further savings later depending on the details of the arrangements.

My right hon. and learned Friend therefore proposes to bring forward legislation in the next Finance Bill the effect of which will be that, starting in April 1983, most payments of mortgage interest will be reduced by deducting the basic rate of tax, at present 30 per cent. from them. From the same date the basic rate tax allowance will be removed from PAYE codings and from tax assessments. Although tax payments will go up borrowers will have the equivalent benefit of lower mortgage payments. These will be worked out and notified to borrowers nearer the time.

Mortgage payments, other than the endowment type, include repayments of capital as well as interest on the outstanding loan. Only the interest will be directly affected by the tax deduction but building societies—and some other lenders—have indicated that they will wish to avoid putting up the mortgage payments each year as the tax relief gets smaller, in step with the interest. To achieve a constant payment—subject to interest rate changes—they will propose a levelling out with a slightly faster rate of capital repayment in the earlier years. Building societies have also indicated that they will sympathetically consider modified arrangements for borrowers who feel that this proposal would create difficulties for them.

Allowances will continue to be biven in codings and assessments to those liable at higher rates of tax for the part of their relief above basic rate. A further advantage of the change is that it will make it possible to absorb the option mortgage scheme within the new tax relief arrangements. My right hon. Friends the Secretary of State for the Environment and the Secretaries of State for Scotland, Wales and Northern Ireland therefore propose that the scheme should be integrated with the tax relief arrangements from April 1983. From that date all 178W borrowers including those with option mortgages will get basic rate relief whether or not their income is sufficiently high to attract tax. The change will not have any material effect on the outgoings of option mortgagors. This change will also be contained in the 1982 Finance Bill.

The Inland Revenue will now continue consultations on the details of the scheme and its coverage. I thought it right to make the Government's intentions known as soon as possible. We shall not, however, be in a position to fill in the details until these further consultations are concluded.