Abolition and Restriction of Interest Tax Relief

1. Interest tax relief has been abolished, with certain exceptions, with effect from 1^st January, 2004.
   This explanatory leaflet explains the new interest tax relief provisions.
    

2. This leaflet does not affect a taxpayer’s right of appeal. It is for explanatory and illustrative purposes only.
    

3. What the abolition of interest tax relief means is that interest on overdrafts and loans for the purpose of buying private assets such as cars, boats, aircraft, etc., and the buying of second homes in Jersey or elsewhere, and other private expenditure, will no longer qualify for any tax relief.
    

4. There are, however, certain exceptions to the abolition of interest tax relief.
    

5. Tax relief on interest paid on mortgages up to a capital sum of £300,000 will continue to be allowed. Mortgages in excess of £300,000 will continue to get tax relief on the interest up to the capital sum of £300,000 but the excess over £300,000 will not qualify for tax relief. These restrictions apply to first time buyers as to everybody else.
    

6. The mortgage must be for the purchase or extension of a principal private residence (house or flat only, not houseboats or caravans or similar) in Jersey only.
    

7. An election will be required from a taxpayer as to what house is to be his principal private residence in Jersey.
    

8. The property subject to the principal private residence election must be occupied such by the taxpayer on a full time basis.
    

9. The interest tax relief is to be given on the basis of the principal private residence itself, not on the number of people who purchase and occupy it as their principal private residence.  For example, if three taxpayers occupy a property as their principal private residence, with all of them having a mortgage of £200,000 to purchase a house worth £600,000 on which they pay total interest of £40,000, they will each receive interest tax relief of £6,667, giving a total tax relief on this principal private residence of £20,000 not  £40,000.  This is calculated as follows:

    (£300,000 ÷ £600,000) X  £40,000 = £20,000 ÷ 3 = £6,667

10. Mortgage interest tax relief will only be granted to those taxpayers who have a mortgage with lenders who have a source of Jersey mortgage income or profits chargeable to tax in Jersey.  (There are provisions to protect those who have mortgages, up to 31st December, 2003, with foreign non-Jersey taxpaying lenders).
     

11. Those who remortgage their house for the sole purpose of getting a better mortgage deal will continue to get tax relief - provided the conditions set out above apply - but any equity released or any part of the re-mortgaging that does not relate to the substitution of the original mortgage or the extension of a principal private residence in Jersey will not attract tax relief.
     

12. Certain transactions between connected parties, e.g., a husband or wife ‘selling’ a house with no mortgage to the other and taking out a mortgage in the process for the purpose of gaining mortgage interest tax relief, whilst spending the money for other private purposes, will not qualify for interest tax relief.  Nor will interest tax relief on mortgages up to the capital sum of £300,000 where the interest rate charged on that capital sum is artificially inflated with a low or nil rate of interest charged on the mortgage in excess of the sum of £300,000.
     

13. Interest paid on mortgages held by ‘share transfer’ and ‘J’ category individuals will be granted tax relief provided the conditions set out above are met.
     

14. In addition to continuing mortgage interest tax relief as above, interest tax relief will also continue to be given for interest incurred for the following purposes:

    • Wholly and exclusively in earning the profits of a trade, profession or vocation

    • Acquiring capital items used by an employee wholly and exclusively in earning the profits and earnings of an employment or office

    • Acquiring land or property for letting on a commercial basis or extending a property that is let on this basis. 

    • Acquiring, in whole or in part, a trade, profession or vocation, or the share capital of a trading company, whether in Jersey or elsewhere.

15. Loans taken out and secured on a principal private residence will not qualify for tax relief as they have not been taken out for the purpose of buying or extending that principal private residence but, if the taxpayer can prove to the satisfaction of the Comptroller that all the money raised has been injected into a trade, business or vocation to continue to earn the profits of a trade profession or vocation — and that none of it has been used for private and personal expenditure — the Comptroller may grant tax relief as an expense incurred wholly and exclusively to earn the profits of the trade, profession or vocation.
     

16. The current provisions of the Income Tax Law, allowing loans and mortgages to be paid under deduction of tax, are abolished in respect of new loans from 1st January, 2004.  All such new loans and mortgages must be paid gross.
     

17. This alteration to the Income Tax Law will not affect annuities, pensions, draw-downs, etc., as they will still be paid under deduction of tax.
     

18. Forcing taxpayers — who currently pay such loans and mortgages net — to pay the interest gross may lead to cash flow problems and hardship for some taxpayers, so they will be allowed to continue paying the interest under deduction of tax for loans and mortgages taken out before 1st January, 2004.  Any excess tax relief on such loans and mortgages will be ‘clawed back’ through the taxpayers’ Notice of Assessment.
     

19. As an alternative to paying interest under deduction of tax for such loans and mortgages, a taxpayer can elect to start paying his interest gross with effect from 1st January, 2004.  An election, once made, will be irrevocable.
     

20. Management expenses under Article 133 relating to interest will be disallowed for private investment holding companies but will continue to be given for life assurance, ‘group holding’ and similar structures.
     

21. Penalties will be charged on taxpayers who falsely claim interest tax relief they should not be claiming, whether on a mortgage, a director claiming tax relief on private interest through his private investment holding/trading company or by a sole trader or partnership claiming tax relief on personal interest in their accounts.
     

22. Any taxpayer with a specific query not covered by this explanatory leaflet should write to the Comptroller of Income Tax for a provisional ruling.

Malcolm Campbell, A., FTII., FCMI.
Comptroller of Income Tax
January, 2004