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Tax Relief
A private individual who pays interest on any form of finance for the purpose of enabling him to buy his own home, to extend it, or to improve it, is entitled to tax relief at his top rate of income tax on the interest paid each year. Relief is restricted to interest on a total borrowing of £25,000. This rule applies whatever the source of finance and is not confined to borrowing from building societies.
Thus a bank customer who obtains a personal loan of £800 for the purpose of installing central heating in his home, on which he has a building society mortgage of not more than £24,000, will find that the real cost to him after tax relief, of paying the true rate of interest of 20.6% per annum will be only seven-tenths of this, namely 14.42%, if he is a basic-rate taxpayer.
No tax relief is available on any kind of borrowing for purposes other than those mentioned above.
TEST QUESTIONS
1. Name six methods of obtaining credit for the purchase of consumer durable goods.
2. In what circumstances would it be reasonable to expect a discount for cash on a retail purchase?
3. Based on the flat interest rate quoted for credit repayable by equal monthly instalments, describe a formula for calculating the approximate true rate of interest payable.
4. Give two examples of methods for obtaining one month's free credit on shop purchases.
5. Who bears the cost of 'free' credit available with a credit card?
6. What is meant by a 'structured' loan?
7. Describe a credit sale agreement.
8. Distinguish between a credit sale agreement and a hire-purchase agreement.
9. How does a shop budget account work?
10. It is claimed that for extended credit on a credit card you would be charged interest at a higher true rate than that on hire-purchase or credit sale, because greater flexibility is repaying the credit is provided. Explain this.
11. Distinguish between a bank overdraft and a personal loan.
12. How is the interest rate determined on an overdraft?
13. Explain the purpose of a bank budget account.
14. In what circumstances can a loan be obtained from an insurance company?
15. In what sense might it be cheaper to buy now on credit terms than to save up and pay cash later on?
16. Is tax relief available on interest paid on borrowed money?
Insurance Companies
Another possible source of finance is available to anybody who has a life assurance policy on which he has been paying premiums for a number of years. Endowment policies and whole-life policies (see Chapter 12 on insurance) acquire a `surrender value' after a certain period. The surrender value is the amount of cash that the insurance company is prepared to pay to the holder in exchange for cancelling the whole of the insurance contract. No further premiums would be payable on the policy and no further benefits could arise on it.
Commonly the surrender value of a policy that has been running... see: Insurance Companies