Lack of relief can tax students: Renting out your home while you go back to college may cause hardship. Maria Scott reports

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The Independent Online
HILARY BURGESS, 33, will soon graduate from the University of East Anglia with an upper second in environmental science after four years' study as a mature student.

She believes she would have gained a first had it not been for the stress caused by a long-running battle with the Inland Revenue over mortgage interest tax relief on the house she rented out when she moved to Norwich to study.

She expects to have to meet a bill for pounds 2,500 for tax relief to which the Revenue says she was not entitled.

Ms Burgess's experience is a lesson to anyone who is thinking of renting out a mortgaged property while they study.

She bought a house in Swindon, Wiltshire, in 1989 with a pounds 30,000 loan from the Mortgage Corporation and pounds 19,000 of her own money from a divorce settlement. She lived in the house between February and October that year, when she started her studies at the University of East Anglia.

'I had lived in that area since 1983 and intended to return to live in Swindon after my degree to be close to my daughter, who lives with my ex-husband nearby.

'In the first year at university, I received a tax return and thought I ought to declare the rental income. In September 1991, I got the bombshell from the tax office saying I was not eligible to be receiving mortgage interest relief.'

Tax regulations specify that tax relief through the Miras (mortgage interest relief at source) scheme is only available on a mortgage if it is being used for a property that is the borrower's only or main residence.

An extra statutory concession does allow for temporary absences of up to four years if the borrower moves 'by reason of his employment' and plans to return after the period away.

It is also possible for people renting their properties to set interest against tax on rental income, but Ms Burgess's income has been too low in the last four years to make her a taxpayer.

The rules on mortgage interest relief seem clear enough, but she was given contradictory advice by the Revenue.

Her students' union sought advice for her from a firm of solicitors in Norwich, which told her that there were circumstances in which tax relief could be claimed by someone in her position as long as she planned to return to the house.

An Inland Revenue official later confirmed this in a letter to the union's welfare office, stating that: 'There are certain concessions for students which I was unaware of.' Ms Burgess was asked to provide the dates that she had lived at the property since renting it out.

By now, though, mortgage rates were rising. Ms Burgess had a deferred rate mortgage that cushioned her from the rate rises for a time, but by the time the deferred period ran out at the beginning of 1992, her loan had swelled to pounds 34,000. The combined loss of tax relief and the rises in mortgage payments meant that her monthly payments eventually climbed to pounds 180 more than when she bought the house.

This meant that she was now renting at a loss.

She put her house on the market and sold it in October 1992 for pounds 40,000.

'By the time all the expenses were paid I was left with about pounds 4,000 out of the original capital.'

Finally, last November the Revenue wrote simply confirming its original position that she was not entitled to mortgage interest relief.

The Independent also had difficulty obtaining a straight answer from the Revenue. At first a spokesman said tax relief through the Miras scheme was available 'only if the property in question is the borrower's home. So when Ms Burgess went to live in Norwich, her loan should have been removed from Miras'.

Later the spokesman changed his tune, stating that there were indeed circumstances in which people could continue to receive relief while living away from their home, but they would normally need to show that they kept a room in the house and stayed there 'for a considerable part of the year'. Because Ms Burgess had rented her property out constantly, she did not qualify.

Ms Burgess said: 'They never explained this to me. If you have to rent a house to cover a mortgage, you can't chuck tenants out every ten weeks. It's ridiculous.'

She added: 'There should be rules on mortgage interest relief for students.'

(Photograph omitted)