ACCA Advanced Taxation (ATX) Practice Exam

How is tax relief for mortgage interest on residential property provided?

1. As a direct deduction from taxable income

2. As a 20% tax reducer against the income tax liability

3. As a refundable credit at year-end

4. There is no tax relief for residential properties

The correct answer is: As a 20% tax reducer against the income tax liability

The correct answer highlights that tax relief for mortgage interest on residential property is provided as a 20% tax reducer against the income tax liability. This means that for taxpayers who are eligible, a portion of the mortgage interest paid can be deducted from their overall income tax liability, effectively reducing the amount of tax owed. In the context of tax relief mechanisms, this method allows homeowners to benefit from a calculated reduction, which makes home ownership more affordable by lowering the effective tax they need to pay rather than reducing their taxable income directly. This is particularly relevant for individuals in higher tax brackets, as it caps the relief at a set percentage, which is 20% in this scenario. The other options offer alternatives that do not accurately reflect the current practices surrounding tax relief on mortgage interest for residential properties. Direct deductions from taxable income would imply a different structure in which the entire interest could be deducted from income, while refundable credits would require an entirely different approach where the taxpayer could receive a refund regardless of their tax liability. Additionally, stating that there is no tax relief at all overlooks the existing provisions available for taxpayers, as many jurisdictions do offer some form of tax relief for mortgage interest payments under specified conditions.