Quote: SBR "Accepting that banks create money out of nothing when they make a loan. What happens to the repayments on the loan?
Now part of the repayment will be covering the interest and so clearly that is profit for the bank (just like mark-up in a shop). However I'm unclear as to what happens to the part of the repayment that reduces the outstanding amount of the loan. Is part of the money which the bank created then destroyed so all of the repayment profit for the bank? Or does the repayment money cancel out the bank created money in some way?'"
I think the answer to your question is nothing. The bank could use the money to lend it out again. Once the money has been created it doesn't disappear and the money supply has been increased. The only way the money "disappears" is if the money supply contracts.
There is a thing called the "money multiplier" which is a ratio of how much money is created by bank lending based on how much the central bank deposits with the commercial banks and what percentage of that they must keep in reserve. If the commercial banks lend the money on then in theory it could increase the amount of money in the economy (the money supply) up to whatever the "money multiplier" says.
So if the aim is to decrease the money supply - destroy money if you like then the government and/or the BoE can do several things. It can increase how much the banks have to hold in reserve (so the money multiplier falls), sell government securities (so money flows back to the government) or put up the interest rates the B of E charges to banks who borrow from it.