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Mortgage Interest Payments

Part of Orders of the Day — Finance Bill – in the House of Commons at 6:45 pm on 15th July 1997.

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Photo of Tim Boswell Tim Boswell Shadow Spokesperson (Business, Innovation and Skills), Shadow Spokesperson (Business, Innovation and Skills), Shadow Spokesperson (Trade and Industry) 6:45 pm, 15th July 1997

I beg to move amendment No. 11, in page 10, line 15, at end insert— '(4) This section shall not come into effect until the average mortgage rate is at or below the rate prevailing on 1st May 1997.' The effect of the amendment is relatively simple. It would prevent the Chancellor's intended reduction in mortgage interest tax relief until the general tenor of interest rates returned to the level applicable on 1 May 1997—a date which, I imagine, is etched on the hearts of hon. Members on both sides of the Committee.

I shall return to the amendment, but first it may be helpful for the Committee if I give a little historical context to the issue of mortgage interest tax relief.

I suspect that, when discussing the subject, many of us are a little eclectic in our use of terms. I am trying to use the stricter term "mortgage interest tax relief', if only to remind the Committee that it is a tax relief given against taxable income on account of mortgage interest, although even that is not a perfect concept now. It is often described as MIRAS, no doubt because the acronym slips more easily off the tongue. That stands for mortgage interest relief at source, which was introduced some years ago. It is the same thing, but reflects the way in which the relief is now payable.

Subject to the indulgence that we may flit from one term to the other, even inadvertently, I shall say a word or two about the concept, how we got to where we are today and what we should do about that.

The original concept, like most things in the income tax system, almost all the way back to Pitt, was a logical one. Income was calculated taking into account all items that were taxable under various schedules, including at that time an implied rental equivalent for any house occupied by an owner-occupier under schedule A. Against that taxable income, the taxpayer was entitled to set off all relevant outgoings. From time immemorial, one of those outgoings was the deduction of interest on account of loans—not specifically tied to house purchase, at that stage.

7.15 pm

Those of us with fairly long memories—in my teenage years, I used to hear these concepts bandied about, even if I did not fully understand them—will remember the sustained pressure in the 1950s for the abolition of schedule A as it affected the owner-occupier. That provision was abolished by a Conservative Government, I think under Mr. Selwyn Lloyd, as a move explicitly favouring home owners. Ever since then, a person who has a discretionary option to invest, say, £200,000 of his money in a house to live in, as against renting a house, or to put the money into shares, bonds or other securities to generate an income with which to pay that rent, is usually favoured in tax terms by being an owner-occupier.

That change came about after a sustained campaign with a great deal of public feeling. It was, I believe, a reflection of the good intentions of the Conservative Government of the day to support owner-occupiers. It was the right thing to do, but it broke the tax symmetry, as it were.

Characteristically, on the other side of the argument for the taxpayer, the succeeding Labour Government in the late 1960s cut off interest on loans—not on house purchase, but on all loans other than for housing. We had moved from a perfect and tidy concept to one that favoured home owners and disfavoured other kinds of borrowing.

Thereafter, the regime was more stable, although along the way a restriction was imposed on the total amount of borrowing eligible for mortgage interest tax relief. Probably as a reflection of the relative stability of that period in the 1970s and 1980s, the importance of mortgage interest tax relief grew. The total cost to the taxpayer, or tax expenditure, rose. In 1991, it peaked at £8.9 billion per annum, which was a substantial cost.

That cost was achieved even though the eligible loans were restricted to £30,000 from 1984 onwards. That has not changed, and will be the subject of a clause to be debated in Standing Committee. I will not talk at length, except indirectly or incidentally, about the limit.

Since 1990–91—the peak of tax expenditure—interest rates in the United Kingdom have fallen sharply. At 1 May 1997, they were at their lowest historic level for more than 30 years. That was an appropriate time for a Conservative Chancellor—who, like all Chancellors, had to set tax priorities—to introduce a number of stepped changes which reduced the level of the relief, alongside the automatic reduction that was taking place on account of the reduction in interest rates. The changes involved the removal of higher rate relief from 1991–92 and the restriction of relief to 20 per cent., and subsequently to 15 per cent.

Anticipating the Financial Secretary's speech, I am sure that she and those on the Treasury Bench will try to justify the Government's changes by implying that they are a continuation and flow from other recent changes. However, in view of the somewhat overblown claims made about the Budget—