BIM45745 - Specific deductions: interest: mortgage interest relief: mixed use of premises

It is becoming increasingly common for properties to be used both for residential and business purposes. If a loan is used to buy such a property and relief for any of the mortgage interest is claimed either as an income tax reduction (ICTA88/S353) or through the MIRAS arrangements (ICTA88/S369) strictly no interest on that loan is allowable as a deduction in computing the profit/loss of a Schedule A or Schedule D Case I/II business as Section 368 and Section 369 (3) make the two forms of relief mutually exclusive.

This contrasts with the situation where separate loans are taken out to acquire the business and residential parts of a property. Here interest on the loan to acquire the residential part qualifies for mortgage interest relief and interest on the business part can be allowed as a business deduction.

Where a property is used both for residential and business purposes relief may be allowable under the terms of ESCA89. This would allow the single loan to be treated as two separate loans so that mortgage interest relief may be claimed for the part relating to the residential use of the property and a deduction made in computing the profit/loss of a Schedule A or Schedule D Case I/II business.

The concession applies in two circumstances:

1.Where a part of a property, which is the borrower's only or main residence, is used exclusively for business purposes the loan in question may be apportioned on the basis of the proportion of the property so used.

2. Where a part of the property, which is the borrower's only or main residence, is only sometimes used for business purposes (but for a significant amount of time and then exclusively) the loan in question may be apportioned on any reasonable basis that takes account of both the proportion of the property so used and the duration of such use.

Mortgage interest relief may then be claimed for the interest on the part of the loan attributable to residential use (subject to the £30,000 qualifying maximum) and a deduction may be allowed for the interest on the part of the loan attributable to business use.

A loan to buy a main residence may be included in the Mortgage Interest Relief at Source (MIRAS) arrangements only if the property is used ’wholly or to a substantial extent' as the borrower's home. This is normally regarded as satisfied if at least two-thirds of the property is used as the borrower's main residence. Where part of a residential property is used for business purposes but it is still used ’to a substantial extent' as the borrower's home all the interest qualifies for relief through MIRAS (subject to the £30,000 qualifying maximum).

Where relief is given through the MIRAS arrangements and the part of the loan attributable to residential use is less than the £30,000 qualifying maximum, some or all of the part of the loan attributable to business use will have been relieved through MIRAS. In these circumstances only the additional relief over and above that received through MIRAS should be allowed as a business deduction.

Computation examples are at BIM45750.