ON INTERRUPT needs to be before start.
Code:
TRISB = %10000000 
INTCON = %11000000 
PIE1 = %00000001 
TMR1L = %11011100 
TMR1H = %00001011 
T1CON = %00110001 
PIR1.0 = 0 

overflow var Byte

On Interrupt goto blink ' enable interrupt checking in start

start:
  If PORTB.7 = 1 Then
    PORTB.5 = 1
  Else
    PORTB.5 = 0
  Endif
  Goto start


  disable ' disable interrupt checking below

blink:
 overflow = overflow + 1
 If overflow = 20 Then
    overflow = 0

   If PORTB.1 = 0 Then
      PORTB.1 = 1 'Turn on LED
   Else
      PORTB.1 = 0 'Turn off LED
   Endif
 Endif

 TMR1L = %11011100 
 TMR1H = %00001011 
 PIR1.0 = 0 
 Resume 
 enable

 END