ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL This change is adverse to some taxpayers and favourable to others in principle. But it is expected to have no practical effect as it is in line with current practice. Change 66: Interest relief: loans partly meeting requirements: section 386
This change introduces a rule to apportion the amount of interest paid where a mixed loan is partly repaid.
Section 367(4) of ICTA deals with a loan in respect of which only a part is used for qualifying purposes (a mixed loan). The rule is that the interest eligible for relief is the percentage of the total equal to the percentage of the mixed loan that was originally applied to qualifying purposes.
It is not made explicit in section 367(4) of ICTA how the interest should be apportioned when a mixed loan is partly repaid. Where the repayment is less than the non-qualifying part of the mixed loan, so that the reduced loan is still mixed, the original percentage is applied. The result is that the repayment is apportioned rateably between the qualifying and non-qualifying parts. But the position is uncertain where the reduced loan is less than the original qualifying part as it could be argued that the reduced loan is no longer mixed and that section 367(4) has no application.
The fairest solution appears to be that all repayments should be applied rateably between the qualifying and non-qualifying parts, so that the percentage of interest eligible for relief is fixed for that loan at the outset. Accordingly, section 386(3) and (4) provide such a rule. The rule confirms the treatment that has been applied in practice.
A different rule applies where capital has been recovered from the investment funded by the qualifying part of a loan. In such a case, by virtue of section 363(1) of ICTA, the qualifying part of the loan is treated as repaid to the extent of the recovery. A signpost to that rule, which is in section 406(5), is provided in section 386(3).