Tax rule vague on cash-back deals

CHELTENHAM & Gloucester has wanted to offer cash- back deals to borrowers taking out variable rate loans, but has held back because it has been unable to get a ruling of the tax status of these payments, writes Vivien Goldsmith.

The Inland Revenue confirmed that there was no established practice on how these payments should be treated. The financial institutions division had looked at some schemes, but each was treated as a one-off and there was no blanket ruling.

An Inland Revenue spokeswoman said some payments might take the form of a rebate of commission paid on an endowment policy, which might disqualify the policy from the tax privileges of endowment polices. It was not clear, she added, whether the borrower or the lender would be liable to pay any tax due.

But most payments are a refund of survey fees or a non-specific gift from the lender - a way of offering all the cash that might otherwise be saved through a one-year discount on the mortgage rate as a lump sum at the outset.

This could be construed as being liable for income tax, or inheritance tax in the event of death within seven years.

Woolwich Building Society offers up to pounds 1,400 to first- time buyers, and a refund of the survey fee plus pounds 200, or pounds 400 on loans over pounds 60,000, to existing borrowers. It has confirmed that it has checked with the Inland revenue that its scheme counts as a discount - money off the mortgage, so there is no tax liability.

Halifax Building Society said it believed the payments were a gift and not subject to tax. Leeds, Coventry, Nationwide, Newcastle and Yorkshire building societies also offer cash-backs.