This clause withdraws mortgage interest relief in respect of any payment of interest on home loans made or falling due on or after 6 April 2000. The clause applies both to interest which is paid under deduction of tax under the Mortgage Interest Relief at Source (MIRAS) scheme and interest paid in full. In addition, the clause denies relief in respect of any payment of interest which is made on or after 9 March 1999 but before 6 April 2000 in accordance with a scheme made for a tax-avoidance purpose. This is intended to prevent borrowers from seeking to forestall the effect of withdrawing the relief for mortgage interest from 6 April 2000. Schedule 4 makes a number of consequential changes to the Taxes Acts as a result of the withdrawal of mortgage interest relief.

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Subsection (1) withdraws mortgage interest relief, not given through the MIRAS (Mortgage Interest Relief At Source) scheme, for interest which falls within subsection (3) or (4).

Subsection (2) withdraws mortgage interest relief, given through the MIRAS scheme, for interest which falls within subsection (3) or (4).

Subsection (3) defines interest that falls within the subsection, and as a result ceases to qualify for mortgage interest relief, as interest:

paid on or after 6 April 2000, or

paid between 9 March 1999 and 6 April 2000 which was not due until after 6 April 2000.

Subsection (4) defines interest which falls within the subsection, and thus ceases to qualify for mortgage interest relief, as interest paid between 9 March 1999 and 6 April 2000 as part of a tax avoidance scheme. This is intended to prevent borrowers from seeking to forestall the effect of withdrawing the relief for mortgage interest from 6 April 2000.

Subsection (5) defines a tax avoidance scheme for the purposes of subsection (4).

Subsection (6) provides some definitions of terms used in subsection (5).

Subsection (7) explains what is meant by "a scheme" for the purposes of the clause.

Subsection (8) gives effect to Schedule 4 which makes a number of consequential changes to the Taxes Acts as a result of the withdrawal of mortgage interest relief.

Paragraph 1 amends section 353 of the Income and Corporation Taxes Act (ICTA) 1988. The changes remove references to repealed legislation and ensures relief for existing life annuity loans (usually part of a home income plan) continues after 6 April 2000.

Paragraph 2 repeals sections 354 to 358 of ICTA 1988. These are provisions which enable mortgage interest relief to be given for home purchase. As this relief is being withdrawn the sections can be repealed.

Paragraph 3 amends section 367 of ICTA 1988. The changes remove references to repealed legislation.

Paragraph 4 amends section 369 of ICTA 1988. This section gives relief through the MIRAS arrangements and is being retained to give relief for certain life annuity loans after 6 April 2000.

Paragraph 5 amends section 370 of ICTA 1988. The changes remove references to repealed legislation and ensure relief for certain life annuity loans continues after 6 April 2000.

Paragraph 6 repeals section 372 ICTA 1988 which gives relief for certain home improvement loans.

Paragraph 7 amends section 373 of ICTA 1988. The changes remove references to repealed legislation and ensure relief for certain life annuity loans continues after 6 April 2000.

Paragraph 8 amends section 374 of ICTA 1988. The changes remove references to repealed legislation and ensure relief for certain life annuity loans continues after 6 April 2000.

Paragraph 9 amends section 375 ICTA 1988 to stop borrowers incurring a penalty simply because mortgage interest relief is withdrawn. Due to the way the existing legislation works borrowers would incur penalties without doing anything wrong.

Paragraph 10 repeals section 375A of ICTA 1988. This section allowed borrowers to chose how they wanted to receive relief where interest paid on a loan qualified for both mortgage interest relief and as a deduction against rental income. As mortgage interest relief is being withdrawn the provision is no longer necessary.

Paragraph 11 makes minor consequential amendments to section 376 of ICTA 1988.

Paragraph 12 repeals section 377 of ICTA 1988. Following the withdrawal of mortgage interest relief this provision is no longer needed.

Paragraph 13 makes some minor consequential amendments to section 378 of ICTA 1988.

Paragraph 14 makes some minor consequential amendments to section 379 of ICTA 1988.

Paragraph 15 makes some changes to section 488 of ICTA 1988 which deals with co-operative housing associations. The changes are necessary as such associations qualify for mortgage interest relief on certain loans. As mortgage interest relief is being withdrawn consequential changes are needed to section 488.

Paragraph 16 makes a change to section 548 of ICTA 1988. There are rules for taxing gains from investing in life insurance of which this section is part. Certain loans are treated in the same way as a part withdrawal from a policy and may give rise to a taxable gain. This stops people taking loans from their insurer in order to avoid a tax charge. A loan to an employee of an insurer used to purchase or improve a home has not been treated as a part withdrawal . This relief mirrors mortgage interest relief and is therefore being withdrawn in respect of new loans at the same time.

Paragraph 17 inserts new subsections (8A) to (8D) into section 222 of the Taxation of Chargeable Gains Act (TCGA) 1992. At present section 222 TCGA 1992 relies on the definition of job related accommodation in section 356 of ICTA 1988. Section 356 is a mortgage interest relief provision which is being repealed. As the definition is still needed for capital gains purposes it is being inserted into the TCGA 1992. The new provision in section 222 TCGA 1992 will work in exactly the same way as the old provision in section 356 ICTA 1988.

Paragraph 18 contains commencement provisions for the schedule. These ensure mortgage interest relief for home purchase is withdrawn from 6 April 2000 whilst relief for certain life annuity loans continues.

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Relief is currently available for interest on a loan used by the borrower to buy an interest in a property which is used as their only or main residence. Relief is also currently available for interest on loans made, or treated as made, before 6 April 1988 for home improvements and the purchase or improvement of homes for a dependent relative or a former or separated spouse of the borrower. Most borrowers receive their relief through the MIRAS (Mortgage Interest Relief At Source) scheme, which is operated by the lenders. Borrowers pay a reduced amount of interest, reflecting the gross interest which they are liable to pay less the tax relief due, and lenders recover an amount equal to the tax relief from the Inland Revenue. Borrowers whose loans are not in MIRAS get relief by way of an "income tax reduction" made through a PAYE coding adjustment or in an assessment.

Relief will continue to be given on home purchase loans at the current rate of 10 per cent until 6 April 2000 when it will be withdrawn.

The anti-avoidance provisions in the clause are designed to stop people obtaining additional relief in the period up to 5 April 2000 by, for example, bringing forward payments of interest which would not otherwise qualify for relief. Without these provisions borrowers may be tempted to forestall the effects of withdrawing the relief.

Relief is available for interest on a loan to an elderly person used to buy a life annuity if the loan is secured on his or her home. These loans usually form part of a home income plan. The £30,000 limit also applies to these loans. Relief on these loans is given at the basic rate of income tax. Again, most borrowers receive their relief through the MIRAS scheme.

The various amendments and repeals in the schedule ensure that mortgage interest relief is withdrawn from 6 April 2000 whilst relief for existing life annuity loans continues. It is necessary to keep a significant proportion of the existing legislation after 6 April 2000 as this will still be needed to give, and administer, the relief for life annuity loans.

At a typical current mortgage interest rate of 6 per cent a home buying borrower with a loan of £30,000 or more will pay around £3.50 a week extra as a result of this change. However on average borrowers will pay only around £2.50 a week extra as a result of the change.

The estimated cost of mortgage interest relief and its value per month to a home buying borrower with a loan of £30,000 or more are:

The 1999-00 figures assume a typical mortgage interest rate of 5.5 per cent.

Average outstanding mortgage - about £39,400 in 1999-00.

Average new mortgages - about £51,300 for first-time buyers and £66,000 for other borrowers at the end of 1998.

Loans over £30,000 - over 90 per cent of new loans are for more than £30,000 throughout 1998.

Total loans - the number of loans of £30,000 or more is expected to be about 7 million in 1999-00, out of a total of 10.7 million loans eligible for relief.

The following table gives the number of beneficiaries of mortgage interest relief by range of total income for 1999-00.

(Total income of the husband given for married couples.)

The average monthly increase borrowers will have to pay after April 2000 as a result of the withdrawal of mortgage interest relief is as follows:

The figures assume a typical mortgage interest rate of 5.5 per cent.

There are approximately 10,000 life annuity loans currently in existence which qualify for tax relief on the interest paid.

Approximately 200 new loans are taken out each year.

The tax relief is worth about £45 a month at a typical interest rate of 8.2 per cent. (8.2 per cent is used as this is typical of the fixed rates available for these loans.)