The death of mortgage interest relief at source (MIRAS) in 2000, provides an interesting history of how tax policy has adopted the changing values and perceptions of society.
From the beginning of the 20th century, when home ownership was rare, property owners were subject to income tax under Schedule A for the benefit of the rent they in effect received from themselves. Mortgage interest relief was allowed as an expense against this related income. This Schedule A was abolished in 1964 by which time the amounts had become nominal. However mortgage interest, and indeed all loan interest, remained tax deductible until 1974.
In 1974, loan interest was restricted to mortgage interest, and this was subject to a maximum limit of £25,000. The average house price was then £11,156. Home ownership had increased to 51% of the population.
In 1983, the limit was raised to £30,000. By this time the average house price was £30,898 and average earnings were £8,901.
At this time, all the main political parties saw mortgage interest relief as an essential element in improving home ownership. Even the left-wing Labour manifesto of 1983 guaranteed that tax relief would continue for mortgages. Hopes that the £30,000 limit would be increased in line with house price rises were never realised.
In 1988 there was a further restriction when the loan was limited to one property, so a couple could not claim for two properties, and relief was withdrawn for loans for home improvements. In 1991, mortgage interest relief was restricted to the basic rate of tax. In 1993, the tax relief was progressively reduced, sinking to 10% from 1997 before abolition three years later. Home ownership continued to grow, reaching 67%. Mortgage interest relief did no more than promote higher house prices.
The abolition of MIRAS has been attacked by the Council of Mortgage Lenders which said “homeowners are now disadvantaged compared to tenants when it comes to government support”. However homeowners are not overall disadvantaged. In particular they build up a large capital gains tax-free asset, and can enjoy preferential terms in obtaining finance.
Losing tax relief has not stopped the growth in owner-occupation, which now applies to 67% of households. Mortgage lending in February 2000 was just under £5 billion, representing a 6% increase over one month. Homeowners now spend 39.3% of their take-home pay on mortgage payments, compared with 69.8% at the height of the housing boom in 1989. Cheltenham and Gloucester figures show that houses are now much more affordable.
The MIRAS saga has two morals. The first is that perceptions are fickle and often unrelated to reality. The second is the oft-repeated observation that tax incentives do not influence what people do, but may influence how they do it. No-one marries, starts a business, buys property or invests because of the tax breaks, but tax may influence how or when they do it. Businesses should not place too much reliance on tax-backed government promotions.
[2000]