This clause changes the residence requirement in the conditions applying to mortgage interest relief given on loans to buy life annuities. These loans normally form part of a home income plan. The requirement meant that interest was not eligible for relief if the borrower did not use the property on which the loan was secured as their only or main residence. Interest will now be eligible for relief if the person moves out of their home into, say, a nursing home. This clause also makes changes which will enable borrowers to re-mortgage or move home without losing their entitlement to relief.

_________________________________

Subsection (1) provides that section 365 of the Income and Corporation Taxes Act (ICTA) 1988, which provides relief for life annuity loans, shall be amended.

Subsection (2) amends section 356(1)(d) of ICTA 1988. The revised provision ensures that as long as a loan qualified for relief before 9 March 1999 then relief will not cease simply because the borrower stops using the property upon which the loan is secured as their only or main residence. This change ensures that the borrower can move out of their home into, say, a nursing home without losing relief.

Subsection (3) inserts new subsections (1AB), (1AC) and (1AD) into section 365 of ICTA 1988. New subsection (1AB) provides a new provision which allows a borrower with an loan which qualifies for relief to re-mortgage without losing relief. This means that existing borrowers can re-mortgage to get a lower interest rate without losing relief.

New subsection (1AC) provides a new provision which allows people with an loan which qualifies for relief to re-mortgage without losing relief and at the same time increase the size of the loan. Many people with these loans have borrowed less than the maximum £30,000 which qualifies for relief. They will now be able to increase their loan without losing relief.

New subsection (1AD) provides a definition of the increase in the new loan for the purposes of the new subsection (1AC).

Subsection (4) replaces the existing subsection (1A) in section 365 with a new version. The new version of subsection (1A) updates the existing provision to reflect changes made elsewhere in section 365.

Subsection (5) is a commencement provision. The new provisions come into effect on the day the Finance Bill receives Royal Assent.

_________________________________

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 applies to these loans. Relief on these loans is given at the basic rate of income tax. 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.

The changes to these provisions are intended to make it easier for existing life annuity borrowers to re-mortgage and move home. Organisations representing existing borrowers have made representations that the conditions governing this relief should be made more flexible. The Government has considered these representations carefully and accepts that while it is right to withdraw relief for new loans, making improvements for existing borrowers helps them make the most of their existing financial arrangements.

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.)