The 1998 Budget brings more bad news for mortgage-holders. Mortgage interest relief, which reduces tax bills and therefore increases take-home pay, will fall again because the standard tax rate has been reduced.
By the 1998/99 tax year, relief for top-rate taxpayers will have been halved over a five-year period.
Mortgage-holders who pay tax at the top rate are now significantly worse off in after-tax terms than they were four years ago. And the 1998 Budget will mean that both they and standard-rate taxpayers will be worse off, because the rate at which everyone can claim relief will be cut from 26 per cent to 24 per cent.
Significant changes in mortgage interest relief were first announced in the 1994 Budget. The aim was to ensure that all taxpayers got relief at the standard rate - the system had benefited those on high incomes by allowing relief at the taxpayers' top rate. Tax relief on mortgage interest has been reduced progressively since April 1994. In after-tax terms, a mortgage now costs the toprate taxpayer more.
Before 1994, relief was available at the top 48 per cent tax rate. But over the past four years a reduction in the relief to the current standard 26 per cent rate has been phased in. The final leg of the four-year plan came into effect from April 1997. And in the next tax year the standard rate will be reduced to 24 per cent, further reducing the relief allowed.
PAYE workers got relief for mortgage interest payments in their tax-free allowances, so the effect of changes in the rules was seen in their take-home pay, which has been reduced to reflect the cut in tax relief.
The table shows that a married couple with a £35,000 mortgage will pay £423 more tax next year than they did in 1993/94 because of the changes in mortgage interest relief. On a mortgage of £65,000 their tax bill will be £825 higher. The highly complicated method of calculating mortgage interest relief has lead to calls from tax practitioners for rationalisation. Taxpayers trying to ascertain their entitlements have to grapple with interest ceilings, deductions from the ceilings, the special provisions for first-time buyers and the impact of marital status.
In Britain the system is much less complicated, though the relief is much less attractive. UK taxpayers do not have to work out their annual entitlement as part of their tax calculations. Known as MIRAS (Mortgage Interest Relief At Source) the interest relief is automatically granted by the lender, based on clear criteria set by the government.
Interest for relief purposes is calculated at the prevailing rate on mortgages to a maximum of £30,000. Relief is allowed at a rate of 15 per cent. For example, assuming a prevailing interest rate of 7 per cent, a taxpayer with a £50,000 mortgage will get relief of £315 per annum, or £26.25 per month, (15 per cent of 7 per cent of £30,000). A taxpayer with a £20,000 mortgage will get relief of £210, or £17.50 per month. There is no difference between relief for single or married borrowers and no special provisions for first-time borrowers. Under the Irish criteria, assuming a 7 per cent interest rate, the maximum mortgage for relief purposes would be about £72,000 for a married couple and about £36,000 for a single taxpayer.
The British system is straightforward but the co-operation of lenders is required to operate it and it would add an administrative burden for lenders.
The Irish system has been moving towards a British-type system, with relief now granted as a credit rather than a deduction. The question now is will a flat mortgage ceiling and a flat relief rate (rather than the standard tax rate) be introduced in Budgets to come?