LIRS’ Public Notice on “Allowable Interest Deductions On Owner-Occupied Residential Houses”

The Lagos State Internal Revenue Service (LIRS) issued a Public Notice yesterday, 20 September 2017, on Allowable Interest Deductions On Owner-Occupied Residential Houses

Albeit that Section 20(1)(b) of the Personal Income Tax Act (PITA) 2011, as amended, allows for the deduction of interest on loans for developing an owner-occupied residential house from taxable incomesno further explanations were provided by the Act as to practical applications of this tax provision in diverse live scenarios. 

This Public Notice seeks to provide the LIRS’ compliance expectations as to the application of this provision of the law in certain complicated circumstances, specifically:

  1. Where several mortgage loans[1]are taken for the development of multiple properties or where one mortgage loan is used for the development of multiple properties or multiple residential units within one property-Application for tax relief is to be made to LIRS (through the annual “Claims for Allowances and Reliefs Form- Form A”) and tax relief will be granted only on the first application, strictly on the property which the owner occupies or on a pro rata basis to the residential unit occupied by the owner.
  2. Where the owner resides in more than one of such properties and has made application for tax relief on all the properties-LIRSwill grant tax relief on loan interest payments, only on the first application or on the property with the lowest mortgage value at the beginning of the period. This prescription by the LIRS is ambiogous; further, LIRS’ choice to grant tax relief on the property with the lowest mortagage value is unsubstantiated by any provisions of the law.
  3. Where the property is uncompleted:LIRS will grant tax relief only upon occupation of such property by the owner, although LIRS is willing to grant tax relief on any interest on such loans paid during the developmental phase of the property, on a case by case basis. There are several uncompleted buildings already occupied by the owners; we believe that by this third proclamation, LIRS is willing to grant tax relief on the loan interest payments where this is the subsisting situation.

Worthy of note is the practical implication of LIRS’ definition of an owner-occupied residential house as “any residential property (i.e. not a commercial property) which an individual has incurred expenditure on the purchase, construction, or conversion for his/her occupation” (the property must be made use of by the individual as his or her sole or main residence). The Notice also goes on to exclude all temporary fixture components such as paintings, electricals, furniture and fittings, etc. from what constitutes an owner-occupied residential house. 

Other points of emphasis on the Notice are:

  • The individual claiming the allowance must provide evidence that he/she occupied the property for at least a 1 year period at the end of the year 
  • The individual must be the verified owner of the house/ property and must have declared the property as owner-occupied in their annual “Claims for Allowances and Relief (FORM A)”. 

These are yet another set of information/ documentation which LIRS is now imposing as additional compliance requirements (consequent to all their recent Public Notices) to what has been hitherto submitted by taxpayers while filing their annual personal income tax returns. From LIRS’ two previous Public Notices on ‘taxation of employee loans’and ‘voluntary pension contribution’, other additional compliance burdens for both employers and individual taxpayers include the requirements for:

  • Employers to file a schedule showing details of their employee loans and the payment terms, alongside employers’annual returns (Form H1), latest by 31 January every year; and for
  • Individuals claiming tax relief on their voluntary pensions to compulsorily submit, on an annual basis, alongside their income tax return, a copy of their RSA statements for the relevant tax year and any other period requested by the LIRS. 

In our opinion, these additional burdensome requirements, while assisting the tax authority to check tax leakages and substantiate what is taxable or otherwise, run contrary to the ‘ease of doing business’ mantra.


[1]The Act did not specifically mention ‘mortgage loan’ but in practice, mortgage loans are usually taken for developing houses due to the project magnitude. Nothing in the law precludes other types of loans taken for developing owner occupied houses from enjoying this tax relief on interest payable.