RE404 - Interest paid: Loans for other purposes: Replacement loans

1999/2000 and earlier years

GENERAL

A replacement loan was a new loan, usually with a different lender, which was used to pay off an earlier loan. Where

• a borrower changed the terms of an existing loan, for example by converting a repayment mortgage to an endowment-linked mortgage (or vice versa); or
• a lender acquired a block of loans from a different lender

you could accept that the original loan continued.

If you have any difficulty in deciding whether a loan had been replaced by a new loan you should obtain all the relevant documentation and refer the case to Savings and Pension Schemes,Technical (St John's House, Bootle).

A replacement loan qualified for relief subject to the usual limits set out in RE360 onwards if the original loan was used wholly or in part

• to buy a property to be used as the borrower's only or main residence;
• to buy a property intended to be used as the borrower's only or main residence and the borrower was living

• to buy an annuity - see RE400;
• to buy or improve or develop a property let commercially - see RE401; or
• for various commercial purposes - see table at RE330 and In1151.

REPLACING OVERDRAFTS

A loan which replaced an overdraft would qualify for relief where the overdraft

• was used solely for one of the above purposes; and
• was replaced within 12 months.

REPLACING MIXED PURPOSE LOANS

Where the original loan was used partly on expenditure that still qualified for relief and partly on expenditure that no longer qualified the replacement loan would be a mixed purpose loan. In particular, where a replacement loan was made on or after 6 April 1988 and could not be treated as if it was made before that date, it would be a mixed purpose loan if any of the original loan was used

• to buy a property used as the only or main residence of a divorced or separated husband or wife of the borrower;
• to buy a property used as the main residence of a dependent relative of the borrower or borrower's husband or wife; or
• to improve or develop a main residence.

RE332 tells you how to handle mixed purpose loans. In general, you could give relief for interest paid only on the part of the old loan which was used for a purpose that still qualified for relief. Normally the outstanding balance on the loan was split in proportion to the qualifying and non- qualifying elements as they stood at the time of the last advance. Alternatively, the outstanding balance could be split in proportion to the amounts originally advanced for qualifying and non- qualifying purposes. Either basis was acceptable.

Example In 1984 a borrower took out a loan of £29,000 to buy a main residence. In 1987 when the balance of the original loan was £27,000, a further £5,000 was borrowed to finance home improvements. In 1994 a loan of £28,000 was obtained from a different lender and used to replace the original loan.

The qualifying element of the loan, on which relief was due, is

Normal basis

Alternative basis